Interest & tax

[Glosphil]

I have now (and in the past) savings accounts that span over two tax years but the interest can't be taken until the account matures in the second tax year, e.g., monthly savings accounts or bonds. However, the issuing bank or building society send a statement of the interest earned at the end of the first tax year although I can't access that interest (i have elected to have the interest added to the account). When the account matures I then receive a statement that shows the total interest earned over the whole period of the account. This second interest figure of course includes the interest that was shown on the first statement.

Are both statements used to report interest earned to HMRC? Is it then possible that I have in effect been taxed on the initial year's 'part interest' twice as it has been reported twice.

I've had similar when an account matured and I was sent a statement showing the original principle and the accrued interest as separate figures. When the total money in the account was then moved to another account instead of the closing statement showing the transfer of the total sum it was again shown as transfer of the original investment plus interest. So the interest has been shown on two separate statements. Could this cause double tax to be demanded?

[C69]

The bank / building society should be issuing a tax certificate for each tax year. The closing statement for the account is a separate thing, really (although the overall amount of interest shown as being added to the closed account will be the same as the total of your tax certificates).

So, if you open a two-year savings bond on 1st June 2024 and interest is added to the account monthly, then you'd receive tax certs for 2024-25 (10 months), 2025-26 (12 months), and 2026-27 (2 months).

If you use a mixture of tax certificates and account statements to complete your tax returns, then yes there could be a risk of double-counting.

[WhiskyDisco]

Until the account matures, and the interest is paid into the account you don't pay tax on it. In the case of a 2 year bond, tax would become payable when the interest has arisen - i.e. been paid to you.

[ferret50]

To keep things simple, try to use an ISA wrapper.

[C69]

WhiskyDisco said:

Until the account matures, and the interest is paid into the account you don't pay tax on it. In the case of a 2 year bond, tax would become payable when the interest has arisen - i.e. been paid to you.

I don't think that this is correct, because it depends when / how often the interest is credited to the account.

Banks / building societies have to submit a bank and building society interest (BBSI) return to HMRC each year. HMRC guidelines say that the banks / building societies "must report on all accounts that have interest paid or credited" and there's no mention of having access to the interest. The expectation is that the BBSI return will correspond to the issued tax certificates.

[YouWhatAgain]

C69 said:

I don't think that this is correct, because it depends when / how often the interest is credited to the account.

Banks / building societies have to submit a bank and building society interest (BBSI) return to HMRC each year. HMRC guidelines say that the banks / building societies "must report on all accounts that have interest paid or credited" and there's no mention of having access to the interest. The expectation is that the BBSI return will correspond to the issued tax certificates.

You are incorrect, you pay tax in the year you have access to the interest.

[Simpo Two]

Remember your personal savings allowance before paying any tax:

https://www.gov.uk/apply-tax-free-interest-on-savi...

Income Tax band Personal Savings Allowance
Basic rate £1,000
Higher rate £500
Additional rate £0

And to avoid any tax on savings at all, use Cash ISAs as said.

[Glosphil]

Thanks for the replies. Most of my savings are in ISAs & I've used my £20,000 allowance for a number of years (I'm retired so will get the £20k ISA allowance/year).

So far the comments are contradictory. Still not sure in which year I pay the tax - when interest credited or when I can access it.

Is the report to HMRC regarding interest received different to the account/interest statements sent to me?

[silentbrown]

Glosphil said:

So far the comments are contradictory. Still not sure in which year I pay the tax - when interest credited or when I can access it.

When you can *potentially* access it, so check the terms of your account. Some accounts the funds are 100% locked until the end of the term. Others, you can extract them subject to a penalty.

Old, but I think it's still right: https://www.which.co.uk/news/article/ask-an-expert...

[alscar]

Just ask the provider for a tax certificate for the year in question showing any interest that has been credited to the account or use their online portal if they have one.
Some provide automatically , others don’t and include as you say with balances.
We have a various mixture of cash accounts including 2 year bonds where payment dates of interest can be misleading but have never had any issues with double counting.

[YouWhatAgain]

Glosphil said:

Thanks for the replies. Most of my savings are in ISAs & I've used my £20,000 allowance for a number of years (I'm retired so will get the £20k ISA allowance/year).

So far the comments are contradictory. Still not sure in which year I pay the tax - when interest credited or when I can access it.

Is the report to HMRC regarding interest received different to the account/interest statements sent to me?

It s as I said it when you can access the interest. I have a fixed bond which pays monthly interest to my current account so I pay tax on that in the current year. Others the interest stays in the bond so I pay tax in the year it matures.

Timing of the Tax

If interest is paid annually/monthly:

The interest is taxable in the tax year in which it is credited and available to withdraw.

If interest is paid at maturity:

For multi-year fixed-rate bonds where the interest is locked and only paid out at the end of the term, all of that accrued interest is taxable in the tax year the bond matures.

Edited by YouWhatAgain on Tuesday 16th June 08:56

[The Gauge]

YouWhatAgain said:

If interest is paid at maturity:

For multi-year fixed-rate bonds where the interest is locked and only paid out at the end of the term, all of that accrued interest is taxable in the tax year the bond matures.

What happens if..

You are a 20% tax payer for the first few years of the investment, but In the final year when the bond matures you are in the 40% tax bracket
Which rate do you pay your tax at?
40% I assume?

[YouWhatAgain]

The Gauge said:

What happens if..

You are a 20% tax payer for the first few years of the investment, but In the final year when the bond matures you are in the 40% tax bracket
Which rate do you pay your tax at?
40% I assume?

Yes, you pay in the tax year it matures at whatever your tax band is at that time. That’s why you need to plan carefully if you take out a product that matures several years in the future.

[scot_aln]

YouWhatAgain said:

Yes, you pay in the tax year it matures at whatever your tax band is at that time. That s why you need to plan carefully if you take out a product that matures several years in the future.

Or taking even a shorter term product that matures just inside or outside the current tax year to max your untaxed interest. Assuming the tax free options have been exhausted.

[Sheepshanks]

YouWhatAgain said:

The Gauge said:

What happens if..

You are a 20% tax payer for the first few years of the investment, but In the final year when the bond matures you are in the 40% tax bracket
Which rate do you pay your tax at?
40% I assume?

Yes, you pay in the tax year it matures at whatever your tax band is at that time. That s why you need to plan carefully if you take out a product that matures several years in the future.

You don’t want to pay more tax than necessary but worst case it’s £200, so not exactly a disaster.

[uknick]

This subject comes up a lot on the MSE tax threads.

Tax is due on interest when you can access it. Despite what most fixed bonds terms say, you can always access the interest by closing the bond albeit with possible severe penalties for early access. This is why you should get an annual interest summary for tax purposes.

There may still be a few products that only declare the interest earnt at term. Those that do exist will say the interest is only calculated at the end of the term and if you close it early there is no interest paid. My partner had such a product from Barclays many years ago. When it matured after 5 years it really messed up her tax position as she had to start submitting a self assessment due to the amount of interest received.

[silentbrown]

Sheepshanks said:

You don t want to pay more tax than necessary but [/b]worst case it s £200[/b], so not exactly a disaster.

Eh?
£20K invested in a 10 year bond earning 5% p/a will give you a much bigger headache in year 10 than £200.

[Sheepshanks]

silentbrown said:

Eh?
£20K invested in a 10 year bond earning 5% p/a will give you a much bigger headache in year 10 than £200.

OP references two tax years, so it'd be £200 difference. Doesn't matter how much in invested as the limits, £500 and £1000 are fixed.

[scot_aln]

If you reach additional rate income tax then personal savings allowance becomes 0.

[The Gauge]

I anticipate putting a chunk of cash into a fixed rate monthly income bond next year so at least I now know when any tax needs paying

Edited by The Gauge on Wednesday 17th June 13:34