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Where Taxpayers and Advisers Meet

Compound Interest

Ellie10
Posts:17
Joined:Thu Jan 25, 2018 1:58 pm
Compound Interest

Postby Ellie10 » Sat Jan 29, 2022 2:44 pm

Help settle a debate pls - at what point should someone declare compound interest?

Annually when statement received but obviously not the actual money - or all together at the end of the x number of years term when the investment is closed and they know they have the money safely in their bank?

I think the former, as apart from anything else surely they are setting themselves up for an even bigger tax bill after closure and declaring it all in one tax year. I am not privy to the actual figures but pretty sure it will be in excess of £50k interest in total over the term.

Thanks

robbob
Posts:3228
Joined:Wed Aug 06, 2008 4:01 pm

Re: Compound Interest

Postby robbob » Sat Jan 29, 2022 4:06 pm

As ever with tax it depends -

Once it is made available to the individual - is probably the best definition to be used. So if interest is known to have been credited to a savings account it would normally be taxable onthat date whetehr drawn or not.

Sometimes with fixed term accounts its not clear whether the interest has been made available to the individual or not.

Generally if its credited to the account as being interest received then its most likley the interest has been received and needs to be taxed.
One would like to think that if the bank confirms that the interest is only credited at the end of the 3 year fixed term then its clear that the interest would be taxed at the end - unless there is some indication that interest has been credited.

It gets messy if i the bank tell you its a fixed term acount with interest paid at the end - but then the interest is calculated and shown annually - thats when it gets messy and it may depend on the t&c's the danger being if exceptionally you can cash out early )eg for excetioanl reasons and there is mention of amounts being credited then technically the interst is available to be cashed.

Note the above is off the top of my head and from memory so please take my comments with a pinch of salt rules may have changed recently without my knowledge.

I would like to think most of the time if the bank says "you declare annually" or your "declare at the end of the term" they are unlikely to be wrong - the danger is they may simply say "we dont give tax advise" in which case you may need to tax advise.
I think the former, as apart from anything else surely they are setting themselves up for an even bigger tax bill after closure and declaring it all in one tax year.
Tradtionally some used to specifically choose to go down this route - if if you retire in 4 years time and are h rate taxpayer now and will be basic rate taxpayer then - you may prefer to get all the interest at the end to avoid higher rate tax.

Ellie10
Posts:17
Joined:Thu Jan 25, 2018 1:58 pm

Re: Compound Interest

Postby Ellie10 » Tue Feb 01, 2022 5:27 pm

Thank you


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