HMRC sent tax demand for my fixed savings account - even though I won't be paid the interest until it matures
I took out a fixed-rate savings deal for three years with a bank. The interest is calculated annually by the bank, but won't be paid out to me until the account matures.
I let the bank report the interest to HM Revenue and Customs for tax purposes as I don't have any obligation to notify it myself.
I then received a tax demand from HMRC for the interest accrued in the 2023/24 tax year, even though the bond is not due to mature until later.
In my case, it means paying out £1,300 years before this tax is due - and the same might happen again next year.
I am also worried that, at the end of the three-year period when I am actually paid the interest, HMRC may end up taxing me again, for the whole amount.
To HMRC's credit, it told me to just write in and explain, but it shouldn't be for taxpayers to sort out the tax system.
Surely more people will be experiencing this issue due to the increase in savings rates in recent years, and fiscal drag moving people into higher tax bands.
Tax trap: Our reader is one of millions of savers who will breach the personal savings allowance and be facing a tax bill - but when do they need to pay it?
Ed Magnus of This is Money replies: You're unlikely to be the only saver with questions about the tax they must pay on interest.
As of October 2024, an estimated 6.1 million savings accounts could be liable for tax, according to new analysis by Shawbrook Bank.
That's up from just 147,000 savings accounts in October 2021.
The personal savings allowance means basic rate taxpayers can earn £1,000 of interest from their savings each year tax free, but this is slashed to £500 for higher rate taxpayers (earning over £50,270) and is zero for those paying the top rate of tax.
You raise an interesting question about when exactly this tax is due on savings interest.
Fixed rate savings deals will either pay interest monthly, annually or on maturity - when the fixed term ends.
If the fixed rate deal you are using pays interest annually into a nominated bank account, then they will be liable to pay tax in each given year they receive interest.
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However, if the fixed rate deal - whether it be two-year, three years or longer - pays out the interest only at maturity, then HMRC states you only need to declare it for the tax year their account matures in.
This seems to be the case where you are concerned, as you can't draw on the interest you have accrued so far.
HMRC states on its website: '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.'
If the interest had been paid to you, for example to a separate bank account, you would have to declare it.
Banks and building societies notify HMRC of interest received, but a saver should only be required to submit a tax return if the total interest (excluding interest from their Isa) was over £1,000 in a given tax year.
HMRC says it is the taxpayers' responsibility to check their tax coding or simple assessment tax return to make sure they are correct.
If a taxpayer thinks the figure for investment income included in their tax coding or simple assessment is incorrect, they should contact HMRC either in writing, by telephoning, or by notifying HMRC via their personal tax account.
HMRC will then check the position and make any adjustment to a person's tax coding or simple assessment.
For expert advice on the matter, we spoke to James Blower, founder of The Savings Guru and Anna Bowes, from the wealth management firm, The Private Office. We also contacted HMRC.
Something to declare: Banks and building societies notify HMRC of interest received
An HMRC spokesperson replies: Tax is charged on interest arising in the tax year.
If interest is credited to a bondholder's account but the bondholder can't access the funds until maturity, then the interest arises, and is taxable, at the maturity of the bond.
James Blower replies: The question is clearly around tax liability on interest on longer-term fixed rate bonds, and the accessibility of any interest being earned from the bond.
If a saver has a three-year bond, but the interest is added to it and cannot be withdrawn or paid on maturity, then the tax liability will become due at maturity.
Take the example of someone taking out a three-year bond today, which would mature on 31 January 2028.
They will be liable for tax on the full interest paid out on maturity, on their 2027/28 tax return, but nothing should be taxed in any of the 2024/25, 25/26 or 26/27 tax years.
James Blower , founder of The Savings Guru
Savings providers have to declare when and how interest is paid to savers when they open accounts, so they are aware of this upfront. However, there will inevitably be people who are caught out.
If the reader believes they are genuinely being taxed on money not received, I'd say they need to write to HMRC to tell them they are wrong.
This isn't the saver having to sort out the system, but just correcting HMRC if either they or the bank or building society have given the wrong information.
Anna Bowes replies: The banks and building societies will know exactly how much interest has been generated and will produce an interest certificate to clarify this.
What this shows depends on when the interest is deemed to be received – either annually, or on maturity. And this is dependent on the bond itself.
For example, the NS&I Guaranteed Growth Bonds deem the interest to be received in full on maturity, whilst other providers that offer the choice will tend to deem the interest as being received annually, even if it is being rolled over each year until maturity.
It makes sense to check this with the savings provider.
If the latter is the case, this can often actually have a detrimental effect, as rather than spreading the interest payments over the term of the bond, it is now deemed to be received only at maturity.
If it is spread out, it could be offset against your personal savings allowance each year, rather than all being applicable in the year that your bond matures.
This puts you at risk of not only exceeding the allowance, but more importantly could push some savers into a higher tax bracket.
The following example assumes the saver is a basic rate taxpayer and has no other savings accounts held elsewhere.
If you invested £50,000 into an NS&I Guaranteed Growth Bond, 3-year term, Issue 74 paying 3.5 per cent AER, and the interest was deemed to have been paid annually (and rolled over so the interest in compounded), you would have received gross interest of £1,750 in year one, £1811.25 in year two and £1,874.64 in the final year.
You would have breaced the personal savings allowance each year and therefore tax would be due.
In this example you would pay 20 per cent tax on £750 in year one (£150), 20 per cent tax on £811.25 in year two (£162.25) and 20 per cent tax on £874.64 in the year of maturity (£174.93) – a total of £487.18.
However, if the interest is counted only in the year of maturity, a total amount of £5,435.89 will be received in one fell swoop.
Anna Bowes , from the wealth management firm, The Private Office (TPO)
Therefore, tax of 20 per cent is due on the £4,435.89 that exceeds the personal savings allowance, which is £887.18 of tax to pay on your savings.
Of course the amount of tax that you may have to pay will differ, depending on your personal circumstances and the allowances available to you.
If you receive interest in excess of the applicable limit, then the onus is on you to make sure that you pay the right amount of tax that is owed.
The tax will be collected automatically through the PAYE system or through a self-assessment, if you already complete one.
But with the PAYE system, your tax code will be amended to allow for the assumed amount of interest you could be earning, rather than the actual amount.
So if your circumstances change, your tax code could be wrong and you could end up paying more tax than you should be.
As a result, it's important to keep an eye on your tax code and contact HMRC if it has inaccurate information about the level of tax you expect to earn on your savings.
My answer is for general information only, not financial advice, and you should seek the advice of a tax expert.
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