Tax on interest on long term fixed rate bond

Hi tricky,

If you opt for the interest to be paid to an account that you can access and make withdrawals, this must be declared on an annual basis. If you keep it in the same account that generates it, that is, the fixed bond, then you will declare it on maturity.

Thank you.

Hi rl11,

As you have a 5 yr fixed bond, if you cannot actually access the account then the interest should be declared in the tax year the bond matures (27/28).

Thank you.

Hi Taxpayer123,

Based on the summary provided your understanding of HMRC's position on the taxation of bank interest is correct. You can see guidance here:                                                                           
SAIM2440 - Interest: taxation of interest: when interest arises

Thank you.

Hi Taxpayer123,

We can only provide the guidance for you to make your decisions from.  

If you still have difficuties after that, then you may need to seek the advice of a financial adviser or accountant.

Thank you.

There is another slight variation that needs to be answered. Most fixed rate bonds allow the account holder to choose if the interest is paid to the fixed rate bond itself or a nominated account. Some will also allow you to vary this initial selection for where the interest is paid to during the bond term. In both circumstances they report the interest with an interest statement / tax certificate during the tax year it was credited, not at the end of the term, and irrespective of where it was actually credited to. Can the HMRC please confirm in the above scenarios that the interest should be reported in the year it was credited in line with the Bank/Building Society provided interest statement and irrespective of whether it is actually credited to the fixed rate bond or the nominated account.

Hi,

If you can actually access the funds to withdraw them then the interest is declared in the year it is added.

SAIM2440 - Interest: taxation of interest: when interest arises

Thank you.

Thanks, can you answer my specific question above though please: Can the HMRC please confirm in the above scenarios that the interest should be reported in the year it was credited in line with the Bank/Building Society provided interest statement and irrespective of whether it is actually credited to the fixed rate bond or the nominated account

All very interesting, yet still inconclusive. I was actually on the phone to HMRC recently, and was told that their calculations for taxable interest are based on the information received from banks etc. So whether or not the interest is accessible becomes moot. Of course, the person I spoke to may have given me incorrect information, as it appears to contradict the 'guidance' given here by HMRC admin. I'm sure this is why HMRC and my own figures are always at odds with each other, as I provide information based on whether interest is paid monthly or annually (i.e. when it is paid, even though I can't access it if paid monthly), yet banks' statements of interest often straddle tax years. So I may have received £1200 interest over a year, but if the 12 month fixed account was opened in October, the banks would only have 'paid' 6 months interest within the tax year. And that is the information received by HMRC. In summary, I'm inclined to go along with others who have said they will provide HMRC with the information that allies with what their banks have provided, ignoring the whole accessibility issue. But that is not what I've done in the past!

Rad1sh. I agree with you. Either the official Interest Statements (used to be called tax deduction certificates) should be followed or not followed. I am hoping my simple question above to the HMRC Admin can close this point: Should interest be reported in the year it was credited in line with the Bank/Building Society provided interest statement and irrespective of whether it is actually credited to the fixed rate bond or the nominated account? If the answer is no, how is it to be explained to the Bank/Building Society that their documents are incorrect and not applicable for the year they have been produced and official tax returns? Pragmatism suggests the statements produced by the Banks/Building Societies should be followed.

Hi Djm23,

We cannot comment on any form of calculation/example or scenario, whether fact or fiction.
We can only point you in the direction of the guidance, so that you can review the guidance and to allow you to make an informed decision.  
If, after that you still need advice, you need to employ the services of a financial adviser. 

Thank you.

I still feel that HMRC are missing the point. The guidance that we keep being referred to, does not make sense! – and the legislation stipulates nothing. How can a financial adviser help? It makes perfect sense to everyone (and surely HMRC?) that you should report interest, according to what the provider shows on your annual Statement of Interest. It shouldn’t matter what the term is or whether you get interest Monthly, Quarterly, Annually or on Maturity – or when you can access it. If the provider is providing the wrong figures (on the Statement and to HMRC) then surely HMRC should intervene with them? Therefore the guidance should be altered to state that we simply report what our annual Statement of Interest shows – or at least, that if we do that, we will not be penalised for doing anything wrong.

I read the discussion closely since I belatedly noticed a paragraph from a statement by NS&I saying: "For our 2, 3 and 5-year ... 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." I had already made annual returns for previous years when, it appears, I should have waited until end-of-term before declaring the interest. HMRC has clearly taken a firm stand on its own interpretation of the law, but I guess they did so for the obvious reason stated in the original post by rl11, that is, they will probably collect more tax as a result. It is a deterrent to anyone contemplating a longer than 1-year term, especially now that interest rates are higher. The matter of interpretation of tax law ought to be decided by the courts but, in the meantime, I shall probably follow their guidance because (last time I had a brush with HMRC) the law said that I must pay whatever sum the Tax Inspector demanded, even though I might dispute the amount, before proceeding to appeal.

having followed this thread with interest, as rates are rising it brings up a few questions as to when interest is taxable on bonds and maturity. If you pay on maturity then you could be bumped up to become a higher rate taxpayer and loose £500 of the personal savings allowance and pay 40% tax on interest over the basic rate! if you take it monthly then it might be enough to keep you under the limit and keep an extra £500 of the personal savings allowance and pay the lower rate of tax? I'm borderline this so it may pay to have the interest paid to my current account and pay the tax in the current year? I can then save this in an easy access account at a slightly lower rates hence keeping more money and paying less tax?

Hi Clive Urry,

Income tax is charged on the arising basis.  
If you have access to the funds before maturity, then the interest is taxed annually.  
If the interest is only paid at maturity, then it is taxed in full in that tax year.

Thank you.
 

Hi HMRC, I just want to ask if my bank issued a certificate of interest of the first year of my 2 years fixed bond which the interest I put back to the bond account. Do I have to declare that first year tax? Does it mean that we should declare tax as same as the certificate of tax issued from our bank? It makes the situation so complex that we get headaches about it.

Hi,
If you have access to the funds in the account at any time, throughout the term, then the interest is taxable in the year in which it arises.  
If you have no access to the funds, until maturity, the interest is taxable in the tax year the bond matures.
Thank you.

Without reading a discussion thread of this type, obviously everyone would report their interest according to what their annual certificate of interest says. What I would like qualified, is that if an individual was to report their interest, based on the annual certificates received from their provider, would they face a penalty, if it was later discovered that it ought to have been reported at maturity?

A question for HMRC: do you believe you have given banks and building societies a tool and guidance that actually allows them to report the interest only when it is accessible at the maturity of a multi-year bond? The guidance for them to report is here: https://www.gov.uk/guidance/how-to-complete-a-bank-and-building-society-interest-return It says "Gross interest amount Enter the amount of interest paid or credited to the account for the reported tax year." Note that "or credited". The problem is that the multi-year accounts may *credit* interest to an account each year, but it won't be accessible until maturity. You instruct them to report the interest to you, nonetheless, and there seems no way for them to mark it as "but this is not accessible in this account". Do you think that all banks with accounts and interest only accessible at maturity are not telling you "the amount of interest paid or credited to the account for the reported tax year", but are instead, because of your guidance elsewhere, holding back the reporting of interest until maturity?

Hi rl11

The savings and investments manual advises at SAIM2440, that taxation of interest is when the interest arises.  
If you don't have access to the savings until the account reaches maturity, then the interest is only taxable when the account matures.  
Have a look at example 2 here SAIM2440 - Interest: taxation of interest: when interest arises

Thank you

Clutching at straws here, but if a 5 year bond gave you the choice [either at the start or, for future interest payments, during the course of the bond] of having the interest paid into another account or back into the bond, does that count as having access even if you chose the reinvestment option? I have seen comments on this where choice has been discussed as if having the choice was the important thing and not what choice was actually taken, but that doesn't necessarily mean they were correct. Thanks.