Savings Interest

[GeoffF100]

I have no access term accounts guaranteed by the FSCS with several banks. I had assumed that interest is taxable in the financial year in which the interest payment appears in my account. This link says just that:

"Interest counts as income for tax purposes on the date it is credited to your account. Most bank and building society income is taxable."

https://www.litrg.org.uk/tax-guides/sav ... gs-and-tax

HMRC has not raised any issues with my tax returns. I have logged into my accounts and they all show interest statement with the interest paid and the tax deducted, which is always zero nowadays. Worryingly, I have found this link:

"Interest ‘arises’ when it is received or made available to the recipient. Interest has been made available if it is credited to an account on which the account holder is free to draw."

https://www.gov.uk/hmrc-internal-manual ... l/saim2440

This is a nightmare! Have I been filling may tax returns incorrectly? I do not want to have to pay tax on the same interest twice. It seems that I can claim back tax for the last four years, but that is going to be a lot of work, and I need to be absolutely sure of the rules before I try to do that.

[Lootman]

On what basis have you been reporting interest income then? If not the date your account statement says it was actually paid? And more pertinently, isn't the consolidated tax certificate the ultimate authority for interest income?

I know that rents are taxable in a different way. You have to declare them on the basis of the period for which the rent was charged and not when it was actually paid. But interest income does not have that complication as far as I know.

I once realised that I had made some similar past errors on my return. The amounts involved were low and the mistake merely changed the year in which the income was taxed, and not how much tax was due. My accountant told me to ignore it as the penalties would be trivial and redoing old returns would have started the 12 month clock ticking again.

In other words if you are confident that the tax owed is about the same, then let sleeping dogs lie. HMRC have bigger fish to fry.

[Gersemi]

I have no access term accounts guaranteed by the FSCS with several banks. I had assumed that interest is taxable in the financial year in which the interest payment appears in my account. This link says just that:

"Interest counts as income for tax purposes on the date it is credited to your account. Most bank and building society income is taxable."

https://www.litrg.org.uk/tax-guides/sav ... gs-and-tax

HMRC has not raised any issues with my tax returns. I have logged into my accounts and they all show interest statement with the interest paid and the tax deducted, which is always zero nowadays. Worryingly, I have found this link:

"Interest ‘arises’ when it is received or made available to the recipient. Interest has been made available if it is credited to an account on which the account holder is free to draw."

https://www.gov.uk/hmrc-internal-manual ... l/saim2440

This is a nightmare! Have I been filling may tax returns incorrectly? I do not want to have to pay tax on the same interest twice. It seems that I can claim back tax for the last four years, but that is going to be a lot of work, and I need to be absolutely sure of the rules before I try to do that.

I assume that your concern is that as the accounts are no access term accounts you are not 'free to draw' on the account at the time the interest is credited in the years before the end of the term.

When in doubt refer back to the legislation rather than any guidance, even tax manuals. From the guidance quoted "ITTOIA05/S370 provides that tax is charged on the full amount of interest arising in the tax year."

The text of ITTOIA05/S370 (https://www.legislation.gov.uk/ukpga/2005/5/section/370) states:

Income charged

(1)Tax is charged under this Chapter on the full amount of the interest arising in the tax year.

(2)Subsection (1) is subject to Part 8 (foreign income: special rules).

So I think that you have been declaring correctly if you have been declaring the interest in the year that it was credited to your account. If you are wrong then so are a great many more people!

I imagine the bit about it being credited to an account that the account holder is free to draw is only to say that the interest is not taxable as it accrues (ie on a daily basis), but rather when it is credited to the account in your name.

You can spend a lot of time going down rabbit holes like this with tax legislation.

[GeoffF100]

Thanks for that Gersemi. The HMRC manual is worrying:

"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."

That is clear, even if it is not supported by the legislation. As you say, there must be plenty of people falling down this rabbit hole, if it actually exists. If HMRC did challenge this, how far could they go back in claiming unpaid tax, and how far back could I go back in claiming tax paid in error?

[AleisterCrowley]

I've always declared interest on fixed term bonds when it's credited on the statement, not at maturity
e.g. National Savings three year fixed rate, I'll declare each year when the interest is credited
I assume this is what HMRC want, otherwise people could defer tax on interest until they are in a lower tax bracket after retirement for example

[Alaric]

I assume this is what HMRC want, otherwise people could defer tax on interest until they are in a lower tax bracket after retirement for example

That cuts both ways. Given the £ 1000 a year exemption for basic rate taxpayers, spreading the interest over separate tax years reduces the risk of exceeding £ 1,000 in any one year

There are some forms of deposit where the interest is known only at the end of the term. I'm thinking of what were sometimes termed "precipice" bonds. That's where the return is expressed as a multiplier of the gain on one or more Stock Marker indexes with the caveat that you could lose some of your money when there's no gain. There was debate with HMRC as to whether these would be subject to Capital Gains Tax or Income Tax. Mostly I seem to think they got classified as deposits.

[bluedonkey]

I agree with Gersemi. In my experience, a routine tax enquiry is triggered when people don't declare the interest credited prior to maturity.

[Lootman]

In my experience, a routine tax enquiry is triggered when people don't declare the interest credited prior to maturity.

Surely it is the discovery by HMRC that such interest was not declared which triggers an enquiry? Rather than the actual act of non-declaration itself.

I would imagine that a significant number of people get this wrong, but it is never noticed by anyone.

[mc2fool]

There are some forms of deposit where the interest is known only at the end of the term. I'm thinking of what were sometimes termed "precipice" bonds. That's where the return is expressed as a multiplier of the gain on one or more Stock Marker indexes with the caveat that you could lose some of your money when there's no gain. There was debate with HMRC as to whether these would be subject to Capital Gains Tax or Income Tax. Mostly I seem to think they got classified as deposits.

No, if there is the possibility of a loss (a "capital at risk" product) then it is a Structured Investment and the returns are subject to CGT. If there is no possibility of a loss then it is a Structured Deposit and the returns are classified as interest and subject to income tax.

[bluedonkey]

In my experience, a routine tax enquiry is triggered when people don't declare the interest credited prior to maturity.

Surely it is the discovery by HMRC that such interest was not declared which triggers an enquiry? Rather than the actual act of non-declaration itself.

I don't understand the distinction you're making.

[AleisterCrowley]

I assume this is what HMRC want, otherwise people could defer tax on interest until they are in a lower tax bracket after retirement for example

That cuts both ways. Given the £ 1000 a year exemption for basic rate taxpayers, spreading the interest over separate tax years reduces the risk of exceeding £ 1,000 in any one year

There are some forms of deposit where the interest is known only at the end of the term. I'm thinking of what were sometimes termed "precipice" bonds. That's where the return is expressed as a multiplier of the gain on one or more Stock Marker indexes with the caveat that you could lose some of your money when there's no gain. There was debate with HMRC as to whether these would be subject to Capital Gains Tax or Income Tax. Mostly I seem to think they got classified as deposits.

I'm sure if there were a legal option to take out a 100% safe fixed rate bond with interest deferred for x years a lot of people would use it to manage their tax affairs

[Lootman]

In my experience, a routine tax enquiry is triggered when people don't declare the interest credited prior to maturity.

Surely it is the discovery by HMRC that such interest was not declared which triggers an enquiry? Rather than the actual act of non-declaration itself.

I don't understand the distinction you're making.

It is not the actual non-declaration of interest that triggers an inquiry but rather the discovery by HMRC that there has been a non-declaration. The first number is much larger than the second number, as the OP's case makes clear.

[AleisterCrowley]

How could HMRC investigate something they are unaware of...?

[Lootman]

How could HMRC investigate something they are unaware of...?

That was the point I was trying to make, evidently not successfully!

I often think that one major cause of errors on tax returns are cases where the tax rule is counter-intuitive, such as this one. People do not tend to read statutes, nor understand them if they do. But they are usually honest and employ common sense when completing forms. But if the rule is oddball or illogical, then mistakes are more likely.

[AleisterCrowley]

I got the point, I was putting it more succinctly!

[bluedonkey]

Perhaps we are going OT. Geoff100 has declared the interest correctly. HMRC are automatically notified by the banks of interest credited.

[Lootman]

HMRC are automatically notified by the banks of interest credited.

No doubt HMRC get copies of the consolidated tax certificates that banks issue for interest. Or easily can do.

Whether they are automatically married up to tax returns or PAYE records for tens of millions of taxpayers is another matter, and somehow I doubt it. So in practice a lot of errors probably get missed. But as noted the difference in tax owed is trivial in many cases. It is usually just a case of interest declared in one tax year rather than another.

If your tax return reflects your consolidated tax certificate then I would generally not worry.

[mc2fool]

I wasn't aware of this and methinks this must have changed recently (in the past couple of years) 'cos I have an NS&I 3 Year Guaranteed Growth Bond, which I opened in mid April 2020, and while the Transaction history show interest added on the anniversary in mid April 2021, the Statement (menu item Your profile->Your documents), which only covers, rather curiously, 14 April 2020 to 7 April 2021 (and so wouldn't include the interest anyway), says the following:

"Important change to how your Bond earns interest for income tax purposes.

For our 2, 3 and 5-year Guaranteed Growth Bonds that are purchased or renewed on or after 1 May 2019, all interest will be treated as being received in the year in which the Bond matures. This is different to how interest was treated for previous issues, where interest was treated as being received annually.

If you're not sure if the Bond will be suitable for you, or how the change in how interest is received affects your circumstances, you should check with HM Revenue and Customs (HMRC) or seek professional financial advice.

Tax information

You may notice that your statement shows no interest has been earned on your Bond within the tax year 5 April 2021. Don't worry, this is because your interest is calculated daily and will be added to your Bond on each anniversary of investment."

So, under Tax information they're saying interest is added annually, but above that they are saying it's only taxed at maturity! Both may be true but having the former under Tax information is just confusing ...

[GeoffF100]

And more pertinently, isn't the consolidated tax certificate the ultimate authority for interest income?.

It used to be when we had standard rate tax deducted at source. That was a smoking gun. It told me that I had to declare the interest on my tax return. Nowadays, no tax is deducted and there is therefore no tax certificate, but that does not mean that I do not have to declare the interest. Indeed, it seems that I am right to do so, if I get a statement showing it paid into the term account.

When I file my tax return online, I enter the total amount of interest in the box. I believe that there is a worksheet in which I could give a breakdown. Would that reduce the risk of trouble or increase it?

[GeoffF100]

I was aware of the change in the way NS&I bonds are taxed. NS&I has dispensation to go outside the normal tax rules. There is no tax to pay on National Savings Certificates for example.

I have a 2 year QIB UK bond through Raisin, which is problematic. The T&Cs say that interest is paid into the account annually and is payable on maturity. That is usual. What is not usual is that I have not received a statement from Raisin showing the first year's interest, which should fall in this tax year.