Fixed Rate Bonds - confused by HMRC advice

poseidon1

https://forums.moneysavingexpert.com/discussion/comment/81958098#Comment_81958098

Sorry was typo, meant 2027/28.

CatLover17

Hello everyone many thanks for your helpful responses. Masonic yes you have captured my situation correctly. I posted my query to see if others have had the same issue.

I am by no means a financial expert but to a lay person, this does seem a very inefficient mechanism. Surely the Savings Providers could be asked to report the correct information to HMRC in the first place.

Enzo_L

https://forums.moneysavingexpert.com/discussion/comment/81960694#Comment_81960694

The savings providers are reporting the correct information to HMRC in the first place.

Savings providers are obliged to report interest paid to savers, either into their accounts or out to accounts with external providers. That's what they do.

Interest is taxable on fixed rate bonds when it can be accessed by savers, so if it is added to fixed rate bonds that don't allow withdrawals then it is taxable in the tax year that the bond matures.

The law relating to when interest must be reported to HMRC and the law relating to when HMRC should tax that interest do not match up.

That isn't the fault of the savings providers.

cc123mm456

I agree that it is not the fault of the savings providers. The issue seems to be that the data layout in the reporting process that HMRC require the savings providers use, was designed without allowing for the fixed term accounts with interest arising in future tax years.

Up to about 10 years ago, the savings interest was paid by banks with basic rate tax deducted. The savers on low income could submit a form to the bank to get the interest tax free. The savers on high income would pay the higher rate tax top up to HMRC, via self-assessment or other methods.

The change for banks to pay all interest gross came in alongside the introduction of the savings allowance, in April 2016. The reasoning was that most savers would not receive interest above the savings allowance, and this approach is better than requiring the majority of savers reclaim tax against interest up to the savings allowance.

My guess is that the interest reporting process was brought in within a limited time frame, and either this issue was not considered, or it was decided it would only apply to so few savers, that it can be worked around (by those savers contacting HMRC to have their tax records adjusted).

In the 10 years since then, there has been significant inflation, interest rates have risen, and tax bands have been frozen. Meaning many more savers will be caught up in the issue.

Actually, the issue might have existed before the 2016 change. The old method was that savings providers would provide an end of year tax deduction certificate, which the savers would use for their tax returns, or other correspondence with HMRC.

Even back then, their could have been disputes, if a savings provider produced 5 annual tax deduction certificates against a 5 year fixed term account, but the saver reported the interest when it was accessible in the 5th year, which has always been the correct process. I'm not sure whether the savings providers would have produced 5 annual tax deduction certificates, or just one in the 5th year.

masonic

Even before the end of deduction at source, this treatment created issues because interest arising at maturity could put people into a different tax band than if it arose annually. The annual certificates of interest and tax deduction use the same basis as the electronic BBSI returns. They were used by those completing a tax return to record the tax already paid, which could be higher or lower than the tax actually due in that year.

There are two factors creating the issue - removal of either one would solve it:

1. Banks are crediting meaningless "inaccessible" compound interest rather than crediting an equivalent sum of accessible interest at maturity.
2. HMRC are using BBSI returns for something they weren't designed for, instead of obtaining specific information about taxable interest arising in each tax year.

There are a number of providers who are able to offer multi-year fixes with all interest credited at maturity, and many who offer pay-away arrangements, so it is an avoidable issue.

Other solutions would involve the FCA banning providers from "crediting" sums of interest the saver isn't yet entitled to draw on, or parliament legislating an amendment to the Finance Act. Neither of these seem likely to happen.

Albermarle

https://forums.moneysavingexpert.com/discussion/comment/81960808#Comment_81960808

Plus there is the issue that most savers in non ISA fixed term accounts, actually benefit from this issue by having the interest more spread out. Although few will be really aware of it.

If it was changed then cue headlines about 'Reeves new stealth tax bombshell'

CatLover17

Another quick question. It would be super helpful to know whether the data returned to HMRC from the savings providers takes into account joint accounts? Is it the total amount that is returned or will it have been halved?

eskbanker

https://forums.moneysavingexpert.com/discussion/comment/81960902#Comment_81960902

The institutions will split it evenly across the multiple account holders…

Edit: actually the splitting is done by HMRC rather than the institutions (who provide the names to allow this), but the point is that you don't have to:

Joint accounts

A joint bank account can be made up of multiple joint account holders, most often it includes 2.

A joint account is reportable if any of the account holders is a reportable person. Return the names of all reportable joint account holders. If you cannot do this, report as many of them as practical.

Inclusion of all reportable joint account holders allows HMRC to match the data with customer accounts.

You should always report the total amount of interest paid.

https://www.gov.uk/guidance/bank-and-building-society-interest-returns#joint-accounts

subjecttocontract

My understanding is that for those accounts that are accessible ......even if you have to pay a fee to access it then the money is available to you and the interest is taxable.

intalex

https://forums.moneysavingexpert.com/discussion/comment/81960917#Comment_81960917

It should never be down to variability on T&Cs, it should simply be determined by transactions and dates (like payroll), as even with AI available, I imagine there isn't enough resource about to review/defend individual cases…