Fixed Rate Bonds - confused by HMRC advice

CatLover17

Hello, after a conversation with HMRC, I am really confused about filing a tax return for interest earned on fixed rate bonds.  I thought that I only needed to file information about interest accrued on fixed rate bonds in the year that the account matures and the interest becomes available.  However, having received a late notice to complete a tax return for FY 24/25, HMRC has advised that I need to file a late tax return and pay tax relating to interest that I cannot access until the bonds mature in future FYs.  HMRC has advised that several banks have sent interest figures to HMRC for interest payments in FY 24/25 but for  accounts that mature in subsequent FYs (e.g. 2028/29).  Has anyone else had a similar issue?  I am very confused, my financial planning is in disarray, and so any advice would be very much appreciated.

Dazed_and_C0nfused

Lots of threads on this on the savings forum.

You need to remember it is Self Assessment so you complete the return in whatever way you think is correct.

The onus is on HMRC to open an investigation into your return if they disagree.

At which point you could put your view to them. But for now you are only required (interest wise) to enter a single figure in the appropriate box on the return.

cc123mm456

I've read most of the previous threads on the issue. To briefly summarize those discussions, as far as I understand the general points.....

The legislation is that the interest is taxable in the tax year that the interest arises.

If it is a fixed term account, with no access to the interest until maturity, then all the interest arises at the date of maturity, and not before.

The annual returns of savings interest from banks/building societies to HMRC do not include any details of the types of account, or the access conditions. The savings providers simply report the interest credited to the accounts within the tax year. This means that HMRC do not know when the interest arises, and the tax payer must apply the rule themselves.

For tax payers that are not in self-assessment, it is usual that HMRC apply the interest to each tax year that it is credited by the savings provider, and it is up to the tax payer to then request a correction where it should be taxed in a later tax year. Probably many people will not know this, and just accept HMRC's update to their tax position. It is usually to their advantage, because it allows the utilization of their annual savings allowance across the years.

It's also been mentioned that in some cases conflicting information has been provided by HMRC, and that some savers (not in self assessment) have attempted to correct their tax position for this issue, but HMRC have made it difficult, because their own staff do not understand the issue.

.............
As D&C mentioned, you are in self-assessment, and so you do not need to be concerned about the issues faced by tax payers that are not in self-assessment. You can apply the rule as you understand it. You would declare all the interest in the tax year that it arises.

As long as you have kept the accurate records, and that the total interest received does eventually get declared (in the appropriate tax year), this should allow you to counter any challenge by HMRC, which is probably fairly unlikely anyway.

CatLover17

Thank you D&C and cc123 for your helpful responses. I had a panic when HMRC advised that I needed to contact the Savings Provider(s) to correct the information that they had previously sent to HMRC. I will follow your advice and file the return applying the guidance in MSE.

Albermarle

OP- The above post is a good summary. In effect HMRC break their own rules, as the annual interest info supplied to them by banks etc. does not include any info on what type of account it is. So by default they tax annually, even for accounts that have no access to the interest until the end of the fixed term.

In fact it has suited me in recent years as I had a 3 year fixed term account, which paid about a £1000 a year in interest. So I paid minimal tax instead of a slug at the end of the fixed term. I do not do SA, and was not going to start doing one just so I could pay more tax, when HMRC themselves seem confused on the issue.

masonic

Are you saying that the only reason HMRC is asking you to file a tax return is that they (incorrectly) believe more than £10,000 of savings interest was received by you in 24/25?

intalex

I think it's high time someone high up from MSE got the attention of someone accountable at HMRC to sort out this inconsistency and put in place a fully consistent rule, mechanism and process… if HMRC need an incentive, doing so may fetch more tax overall (albeit later) than the current "default", since tax will apply on big lumpy "arising" interest in the maturity tax year vs straight-line interest spread across multiple tax years…

poseidon1

However, there is an alternative aspect to be aware of, and that is if you self assess on what you believe to be the correct position ( ie when interest becomes available to you), your tax bill with be 2% higher.

For 2024/25 and 2025/26 you only pay 20% or 40% ( if higher rate). For 2025/26 onwards you are on the hook for 22%/42%.

This additional tax exposure may not change your mind about what is correct, but HMRC's approach does save you a little tax at the expense of paying earlier than need be.

I have noticed on this forum that it does not appeared to have properly sunk in, that higher tax rates are now due on future savings and investment income, and perhaps for those with multi year fixed interest accounts running at present, the opportunity to pay tax at the lower prior year's rates on a portion of their interest might hold some appeal.

Marcoos

https://forums.moneysavingexpert.com/discussion/comment/81958090#Comment_81958090

"For 2024/25 and 2025/26 you only pay 20% or 40% ( if higher rate). For 2025/26 onwards you are on the hook for 22%/42%."

Is the last part a typo?

DRS1

The change for savings interest is from 27/8 on (same as rent) but the change for dividends is from 26/7 on.

cc123mm456

It is true that by applying the correct rule to pay tax on the interest when it arises, where that date will be in the 27/28 tax year or later, this will mean that the tax rate is 2% higher than it is now.

Although it seems counter-intuitive, this can be the better financial outcome in some circumstances.

The OP has indicated that the interest is expected to be available to withdraw in tax year 2028/29, so this seems to be a 5 year fixed term account starting in 2023/24.

For this calculation I will assume that the OP is a basic rate tax payer, and has already fully utilised the savings allowance against other savings in every tax year. I've used an example savings amount of £100,000 at 5% annual interest compounded.

Using the (incorrect) HMRC default approach, the tax would be 20% in 24/25, 25/26 and 26/27, and 22% in 27/28 and 28/29. Total tax to pay is £5,763

Using the (correct) approach to tax all the interest in 2028/29 at the rate of 22%, the total tax to pay is £6,078. That is about £315 higher.

However using the first method, the OP would then have had to pay the tax earlier. The first payment 4 years too early, the 2nd 3 years too early etc. The interest that could have been received on those amounts, if held in an easy access account, at approximately 3% after tax, calculates to roughly £319.

So the difference is negligible, a few pounds better off with the correct method.

More importantly, the OP may have planned for the fixed term saving to mature in 28/29, with the expectation that the other income would be lower at that time. This may mean that in earlier tax years they would be paying higher rate tax at 40% or 42%, and in the 2028/29 tax year, there is expected to be headroom to receive the interest at basic rate.

There is also the impact on cash flow to consider. If the tax bill was not planned for (because it was demanded too early), then other savings may need to be used to pay it, and these might be in accounts that require payment of a penalty for early withdrawal.

In extreme circumstances (although unlikely), a saver might have to borrow to fund the early tax payment against interest that is not yet available to them.