Fixed Rate non-ISA Bonds, straddling 2 tax years: new 22 per cent tax rate on interest

Annemos

I have noticed this. (I think). Does anyone have any comments?  

There have been several prior threads on this site, about when Interest Income should be reported to HMRC for tax purposes, when a Bond is, say, a 2- year Bond. And there is no access to any of it until Maturity. (Not even any option to take it with a Penalty deducted.)

The correct answer seems to be, that all the 2 years of interest is taxable at the end of the 2-year period on Maturity. 

-----------------------

This is due to:    

https://www.gov.uk/hmrc-internal-manuals/savings-and-investment-manual/saim244

Their Example 2 says:    

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.

==============================

The discussions in the past have always been about the timing of the taxation and not the actual amount of tax. 

(Building Society Statements tend to show interest income credited into the account annually, even if not accessible. Some people have just been reporting the Interest income annually to keep in step with the generated statements...., even though, technically, all of it should only be reported at Maturity, if there had been no access allowed during the life of the Bond.)

The thing is, we now have an actual Tax Amount issue, too, since the budget. Because 26/27 is 20% tax rate, but 27/28 is 22% tax rate!  

I have 2 Building Society Bonds where my Interest income will straddle these 2 tax years. I should be taxed on all the 2 years interest income at 22%. But how will HMRC know about this, if the Building Societies do not report correctly when it should be taxed? 

This will potentially cause a lot of headaches and even more Letters to HMRC flying around to try and get the tax correct? Is there no way round this? 

I have asked one of the Building Societies to look into this for me. (What will they be doing for reporting purposes?)  Why can't they have a Check-Box:  checked if there is no allowed access to the Bond interest until Maturity.

Thanks for reading.

Dazed_and_C0nfused

Annemos said:

I have noticed this. (I think). Does anyone have any comments?  

There have been several prior threads on this site, about when Interest Income should be reported to HMRC for tax purposes, when a Bond is, say, a 2- year Bond. And there is no access to any of it until Maturity. (Not even any option to take it with a Penalty deducted.)

The correct answer seems to be, that all the 2 years of interest is taxable at the end of the 2-year period on Maturity. 

-----------------------

This is due to:    

https://www.gov.uk/hmrc-internal-manuals/savings-and-investment-manual/saim244

Their Example 2 says:    

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.

==============================

The discussions in the past have always been about the timing of the taxation and not the actual amount of tax. 

(Building Society Statements tend to show interest income credited into the account annually, even if not accessible. Some people have just been reporting the Interest income annually to keep in step with the generated statements...., even though, technically, all of it should only be reported at Maturity, if there had been no access allowed during the life of the Bond.)

The thing is, we now have an actual Tax Amount issue, too, since the budget. Because 26/27 is 20% tax rate, but 27/28 is 22% tax rate!  

I have 2 Building Society Bonds where my Interest income will straddle these 2 tax years. I should be taxed on all the 2 years interest income at 22%. But how will HMRC know about this, if the Building Societies do not report correctly when it should be taxed? 

This will potentially cause a lot of headaches and even more Letters to HMRC flying around to try and get the tax correct? Is there no way round this? 

I have asked one of the Building Societies to look into this for me. (What will they be doing for reporting purposes?)  Why can't they have a Check-Box:  checked if there is no allowed access to the Bond interest until Maturity.

Thanks for reading.

Based on what other people have posted you are worrying unnecessarily.

HMRC will include the interest reported by the banks and building societies in their calculations, so you will pay 20% rather than 22% on part of your interest.

If you file Self Assessment returns and declare the interest using the rules you think are correct then you will have to pay the extra 2% on whatever income you include on the 2027/28 return (above the savings starter and savings nil rate bands if either apply to you).

Annemos

Many thanks for fast reply.

I don't do self-assessment. 

I saw a newspaper article, which I am trying to locate again, where the accountant said:  there is no excuse for allowing the interest to be taxed incorrectly in the wrong year. Everyone should write to the Inland Rev, to get it taxed in the correct year.

I am also thinking ......    is it right, now, that people should try and get away with paying a lower tax, when they know the tax should be higher? (Could Inland Rev find out, even?)

(I will try and find the article, again.)

Annemos

I have located the Article I read:  

https://www.thisismoney.co.uk/money/saving/article-14342041/HMRC-sent-tax-demand-fixed-savings-account-wont-paid-matures.html


====================================

Also this Accounting Firm writes this:    

Your Responsibilities: Reporting to HMRC

Although banks and building societies now provide HMRC with direct access to savings income data, you are still ultimately responsible for appropriate tax filing.

• Verify your tax code: Errors can happen, but if savings interest is reported, HMRC may change it.
• Review annual bank statements: Make sure that the interest shown on the yearly bank statements corresponds to the information that HMRC has on file.
• Declare additional income: If you have overseas or offshore accounts or earn more than the Personal Savings Allowance, you may need to use Self Assessment.
• Respond promptly to HMRC letters: To avoid fines, reply to HMRC correspondence as soon as possible and explain or rectify any inconsistencies.

In summary, even though reporting is becoming automated, it’s crucial to maintain awareness and make sure your savings income is appropriately taxed.

https://julianhobbs.com/blog/hmrc-savings-account-tax-warning-explained/

Albermarle

Building Society Statements tend to show interest income credited into the account annually, even if not accessible. Some people have just been reporting the Interest income annually to keep in step with the generated statements...., even though, technically, all of it should only be reported at Maturity, if there had been no access allowed during the life of the Bond.)

I would think the large majority of savers in multi year fixes affected are either;
1) Blissfully unaware of anything to do with tax on savings interest, like they are with most personal finance issues.
2) Aware of tax on savings interest, but let HMRC calculate it and do not check it.
3) Aware of tax on savings interest and check that HMRC have used the same figures as the annual bank statement,  but are unaware of any issue with fixed rate bonds over one year.
4) Are aware of an issue, but as they do not do SA, they are not going to get in a discussion with HMRC just to pay more tax ( interest being taxed annually rather than at the end of the fixed term is likely to mean more tax for most people) especially as HMRC are hard to contact, and quite possibly the person you speak to will have no idea about the subject. 
5) As 4) but they 'force' the issue with HMRC, maybe having spent many happy hours on the subject.
6) Do SA but put the annual interest figures ( deliberately or through lack of knowledge)
7) Do SA and put the interest earned at maturity in the box. 

According to the link in the previous post, all but 5) and 7) is tax evasion.
However as the large majority of the others will not be doing it deliberately, it seems unlikely that HMRC will ever pursue them, especially as their systems are at least partly at fault and it is not even clear how aware they are of the issue.
If they did, cue screaming headlines about HMRC pursuing poor pensioners etc.

Annemos

Many thanks Albermarle, for your detailed consideration of what goes on. 

You have brought a smile to my face, with all those possibilities. 

I used to work in a different Country's Tax system which was much tighter than this.

(The UK system does make me want to cry. I have a real dislike of tax being clawed back through a Norice of Coding, a couple of years down the line. Mixing of Tax Years.)

Dazed_and_C0nfused

Annemos said:

Many thanks Albermarle, for your detailed consideration of what goes on. 

You have brought a smile to my face, with all those possibilities. 

I used to work in a different Country's Tax system which was much tighter than this.

(The UK system does make me want to cry. I have a real dislike of tax being clawed back through a Norice of Coding, a couple of years down the line. Mixing of Tax Years.)

You can always pay the tax direct to HMRC in that situation if you want to avoid your tax being changed to collect it back.

eskbanker

Annemos said:

The UK system does make me want to cry. I have a real dislike of tax being clawed back through a Norice of Coding, a couple of years down the line. Mixing of Tax Years.

You're quite welcome to decline HMRC's offer of an interest-free loan if you wish, every small thing that helps prop up the nation's finances is appreciated!

masonic

Perhaps this forthcoming tax rate change might finally prompt HMRC into doing something about the situation, like including a column for BBSI respondents to include the tax year sums of interest arise for tax. But then again...

The whole issue can be avoided by taking out accounts that pay away interest to an external account, or by providers refraining from crediting interest that wouldn't be accessible until the end of the term (a small number already do this).

intalex

masonic said:

or by providers refraining from crediting interest that wouldn't be accessible until the end of the term (a small number already do this).

This would save the art of compounding from dying...

Annemos

eskbanker said:

Annemos said:

The UK system does make me want to cry. I have a real dislike of tax being clawed back through a Norice of Coding, a couple of years down the line. Mixing of Tax Years.

You're quite welcome to decline HMRC's offer of an interest-free loan if you wish, every small thing that helps prop up the nation's finances is appreciated!

The stress and annoyance of not having things finalised and having to monitor it for ages, drives me crazy. I am happy to just pay my dues on time. 

I have decided that from now on, I shall only have 2-year bonds if within ISA accounts. Not within non-ISA's. 

Because the other problem with all this nonsense, is that they also do Notices of Coding to estimate the next years income based on Prior Year Income. And with these 2-year bonds you end up with an oscillation effect of more in one year and then less in the next year from these bonds. So, my suspicion is that HMRC will always be coming after me for the wrong amount, due to the taxable 2-year Bonds. 

Best to go nowhere near them in future, I feel. (I only have the 2 of them, now, because my Mum just passed away. My other stuff is safely in ISA's.) A lesson learnt!