Interest reported to HMRC in wrong year

MinstrelWelly

I've just found that Paragon and JN Bank have both reported interest to HMRC in 24/25 that isn't taxable until 26/27 (because its been added to a fixed term savings account). Consequently, that interest will be taxed in 24/25, which is going to cost me about £600 in incorrect tax. Not sure if all banks are the same, or its a problem with just some banks.

I've spoken to HMRC, who obviously could talk to the banks, and ask them to report the figures correctly, and solve the problem for all those affected, but they're not interested, and tell me I've got to contact the bank to get my figures corrected.

I've spoken to Paragon, who just say that their process is to report interest in the year its credited, not the year in which tax is due.

I'm still awaiting a response from JN Bank.

This leaves me with several questions

1) Is the correct process for the banks to report interest in the year that its due, rather than the year its credited (or are they supposed to report in the year credited, but tell HMRC which year its taxable in)?

2) Do any of the banks get this right? I.e. are all banks getting it wrong, or have I just got unlucky with my choice of banks?

3) How can I proceed from here? Neither HMRC, nor the banks, perceive a probem, or at least, its not there problem. How can I get my tax corrected? At the moment, my only thought, is to raise a formal complaint with each of HMRC/Paragon/JN. HMRC for not ensuring that the banks are reporting correctly, and the banks for not reporting correctly (but it would help to be absolutely clear what the banks are supposed to be reporting)

etienneg

What were the terms of the accounts in question as regards payment of interest? In particular, was it mandatory for interest to be credited to the fixed-term accounts when it was paid, or could you have had this interest paid out (for example, to your current account)?

dunstonh

1) Is the correct process for the banks to report interest in the year that its due, rather than the year its credited (or are they supposed to report in the year credited, but tell HMRC which year its taxable in)?

Can you clarify what you perceive to be "due"?    Are you thinking the maturity date?

Many fixed-term deposits will pay interest annually, even if they do not mature that year.   

2) Do any of the banks get this right? I.e. are all banks getting it wrong, or have I just got unlucky with my choice of banks?

I've never noted an issue and in most cases, the interest is annual even when the FTD isnt.

3) How can I proceed from here? Neither HMRC, nor the banks, perceive a probem, or at least, its not there problem. How can I get my tax corrected? At the moment, my only thought, is to raise a formal complaint with each of HMRC/Paragon/JN. HMRC for not ensuring that the banks are reporting correctly, and the banks for not reporting correctly (but it would help to be absolutely clear what the banks are supposed to be reporting)

If the bank is applying the interest annually, then there is nothing wrong.

Not sure what you would have to complain about 

MeteredOut

Does the fixed term savings account have any facility to access the interest early, even if that incurred fees?

See: https://www.gov.uk/hmrc-internal-manuals/savings-and-investment-manual/saim2440

"Example 2

Sam entered into a five year fixed-term bond on 6 April 2017.  The bond credits interest to Sam’s account annually on the 31 December.  Sam can only gain access to both the annual interest and the principal in advance of 5 April 2022 if a penalty is paid for early access.

Since the terms and conditions of the bond allow Sam to draw on the funds, although with a penalty, the interest arises and is taxable each year as it is credited.

If the terms and conditions of the bond did not allow access until maturity, the interest would arise and be taxed at that point."

There are a number of threads on these boards asking similar questions - do as search and you'll see its not as simple as it might first sound, including different banks reporting different things for what would outwardly seem like the same type of savings account, and sometimes contrary to what the HMRC manual above states.

MinstrelWelly

Thanks for your responses.

By 'due' I meant when the tax is due. Interest is paid each year, but that interest is taxable at the end of term (so all interest is taxable in the tax year of end-of-term)

With regard to the Gov.uk manual, and 'Example 2'. Yes, I've checked that out. I don't have access to the money until end-of-term, even with a penalty. Tax is definitely due on all the interest at end of term.

I've been reading the Gov.uk instructions to banks on reporting interest earned via the "Bank And Building Society Interest Returns". I'm a newby so can't post links, but if you google the quoted return name, it'll be the first option.

The instructions just say that banks must annually report interest paid. There is no mention of reporting interest in the year when tax on it is due. The spreadsheet only has one column for tax year (so you can't separately identify the year interest was credited and year interest is taxable), and the instructions say you only need to fill the year column in for one row, so the implication is that all entries will be for the same tax year.

So, my take is that the banks are following the instructions, in reporting the interest credited each year (in the tax year that its credited). Meanwhile, HMRC are treating it as taxable in the year reported (which is the year in which the interest is credited, but not the year its taxable!)

Or put it another way. HMRC are assuming that banks will report interest in the year that it is taxable, even though they haven't told the banks to do that via their instructions.

MeteredOut

MinstrelWelly said:

Thanks for your responses.

By 'due' I meant when the tax is due. Interest is paid each year, but that interest is taxable at the end of term (so all interest is taxable in the tax year of end-of-term)

With regard to the Gov.uk manual, and 'Example 2'. Yes, I've checked that out. I don't have access to the money until end-of-term, even with a penalty. Tax is definitely due on all the interest at end of term.

I've been reading the Gov.uk instructions to banks on reporting interest earned via the "Bank And Building Society Interest Returns". I'm a newby so can't post links, but if you google the quoted return name, it'll be the first option.

The instructions just say that banks must annually report interest paid. There is no mention of reporting interest in the year when tax on it is due. The spreadsheet only has one column for tax year (so you can't separately identify the year interest was credited and year interest is taxable), and the instructions say you only need to fill the year column in for one row, so the implication is that all entries will be for the same tax year.

So, my take is that the banks are following the instructions, in reporting the interest credited each year (in the tax year that its credited). Meanwhile, HMRC are treating it as taxable in the year reported (which is the year in which the interest is credited, but not the year its taxable!)

Or put it another way. HMRC are assuming that banks will report interest in the year that it is taxable, even though they haven't told the banks to do that via their instructions.

This is exactly the complexity I referred to. There's a thread here somewhere (and try as I might, I still can't find it) where this issue is discussed in detail.

I think (but am not 100% sure) that some people got to the point where when they were confident that they did not have access to the interest, they submitted their self-assessment without the interest (to override what HRMC would do) and moved on from there. I'm think some may have even spoke to HMRC about doing this.

MinstrelWelly

Thanks. 

I don't currently submit tax returns - I have simple assessments

My initial conversation with HMRC indicated that the figures they get from the banks' interest submissions are deemed correct, and not up for discussion - there is no way to override (or they're not telling me how). The only way they suggested the figures could be corrected was if I could pursuade the banks to resubmit the interest figures (and I'm not sure if there is a process for the banks to correct erroneous figures once submitted).

I did try searching for existing relevant threads before starting a new thread, but as you've demonstrated, if it exists, its not easy to find 

fuzzzzy

I'm sure I have read on this forum people disputing when the tax is due and posting HMRC their account terms and conditions to prove that the interest is not accessible until end of term maturity.

Albermarle

From previous threads- The HMRC rules are that a fixed term savings account of more than one year, that is not accessible until the end of the fixed term, should only be taxed in the year it matures.
However nearly all savings providers report interest annually, regardless of the fixed term.
From this annual interest reporting HMRC can not see exactly what kind of account it is, so just tax it in the year it is reported.
So they kind of break their own rules.
The MSE savings section says that you should plan for interest to be taxed at the end of the fixed term, although clearly this is not happening, most of the time at least.
Comments on HMRC forums have been contradictory.
So a bit of a mess.
In my own case I had a 3 year account with Nationwide, which matured last month, and the money was inaccessible during that period. However interest was added annually and it is clear from my online personal tax account, that it has been taxed annually. 

Notepad_Phil

Unfortunately government regulations require banks etc to supply the details of interest paid during a tax-year, but there is nothing on that report which says whether that interest should really be taxable in that tax-year. So yes the hmrc just assume that all reported interest is taxable in that tax-year even when it shouldn't for these multi year accounts where the entire interest should all be taxable in the final year. Note you will find the final year will only be taxed on that year's interest rather than the entire amount, so everything might end up okay - but if this is a problem then you'll have to get yourself into self-assessment where you can specify the correct amounts,

Albermarle

dunstonh said:

1) Is the correct process for the banks to report interest in the year that its due, rather than the year its credited (or are they supposed to report in the year credited, but tell HMRC which year its taxable in)?

Can you clarify what you perceive to be "due"?    Are you thinking the maturity date?

Many fixed-term deposits will pay interest annually, even if they do not mature that year.   

2) Do any of the banks get this right? I.e. are all banks getting it wrong, or have I just got unlucky with my choice of banks?

I've never noted an issue and in most cases, the interest is annual even when the FTD isnt.

3) How can I proceed from here? Neither HMRC, nor the banks, perceive a probem, or at least, its not there problem. How can I get my tax corrected? At the moment, my only thought, is to raise a formal complaint with each of HMRC/Paragon/JN. HMRC for not ensuring that the banks are reporting correctly, and the banks for not reporting correctly (but it would help to be absolutely clear what the banks are supposed to be reporting)

If the bank is applying the interest annually, then there is nothing wrong.

Not sure what you would have to complain about 

The OP is complaining because they expected to be taxed on the interest at maturity only, and not in the intervening years. 
Which for inaccessible interest seems to be what should happen ( but often does not)

Note the info in the savings section of MSE>>

Imagine you save £10,000 in a five-year fix which pays 4.5%.

• Option 1: Interest is paid out of the savings account to your bank account each year, meaning you can access it when it's paid.
  
  Here, you'd earn £450 each year for five years. As you'd be earning less interest than the basic- and higher-rate personal savings allowance (PSA) limits (£1,000/year and £500/year respectively), you'd pay no tax on the interest.
  
  After the five years, you'd have earned a total of £2,250.
  

• Option 2: Interest is paid back into the fixed account each year, and you can't access it till the account matures.

  
  Here, you'd earn interest on your interest, meaning that after five years you'd have earned £2,460 – about £200 more than with the first option. However, because you can't access the interest until the end of the five-year fixed term, all the interest counts towards the fifth year's PSA, and far exceeds both the basic- and higher-rate limits. This means you'd have to pay tax – about £292 for basic-rate taxpayers, £784 for higher-rate.
  
  This means that, overall, basic-rate taxpayers would be £80 worse off than with the first option, higher-rate taxpayers a massive £570 worse off.