BUDGET 2016
Synopsis: Rewards paid by banks are deemed by HMRC to be annual payments which means that the payment is fully taxable and will not benefit from the personal savings allowance.
The new personal savings allowance, introduced in the 2015 Budget and applicable from April 2016, allows basic rate taxpayers the ability to earn up to £1,000 a year tax free on their savings income. Higher rate taxpayers will be able to earn up to £500 a year tax free on their savings income however, additional rate taxpayers will not benefit from an allowance.
Savings income for these purposes includes
- interest on bank and building society accounts
- interest on accounts with providers like credit unions or National Savings and Investments
- interest distributions (but not dividend distributions) from authorised unit trusts, open-ended investment companies and investment trusts
- income from government or company bonds
- most types of purchased life annuity payments
- gains from certain contracts of life assurance
However, in the context of a bank or building society account, it has emerged that the income is only tax free under the personal savings allowance if it is classified as an interest payment.
A fixed monthly income paid by way of a reward is classed as an annual payment rather than interest, which makes the payment fully taxable and not capable of benefiting from the personal savings allowance.
These annual payments are effectively fixed rewards for putting the money on deposit in the first place and are commonly offered by Halifax, Barclays and Co-op Banks.
HMRC stated: ‘Annual payments are not covered by the personal savings allowance, so banks and building societies will continue to pay them after basic-rate tax has been deducted.’
It will, however, be possible for non-taxpayers to reclaim the 20% tax deducted at source on these payments by completing form R40.
Note these changes do not affect those who receive interest for maintaining a certain balance in their account. For example, Santander pays between 1% and 3% interest on account balances up to £20,000. In this case the amount is paid out without deduction of tax at source and the individual will owe income tax if the amount exceeds their personal savings allowance.
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