Apportioning tax on savings interest on (for example) 2-year bonds

The advantage of things like fixed term bonds is that you get a better rate of interest compared with straightforward savings accounts. The disadvantage is that you get no interest until the bond has matured. If you have (for example) a 2-year bond, you don't get any interest for two years.
The question is, how do HMRC apportion the tax on the interest? If you declare the total interest only after it gets paid to you, you could end up paying more tax than you would have paid if the interest had been paid in each tax year.
For example, if the interest had been spread over the two years, your taxable income in each year might have been just below your personal allowance tax threshold. You would therefore pay no tax in either year. However, if you receive (and declare) your interest as a 'bumper bundle' in the second year, you will pay no tax in the first year, but you will pay tax in the second.
And, of course, it could be even worse with longer-term bonds - no tax for several years, then a whammy in the year a bond matures.
So, is there an easy way of avoiding this phenomenon? For example, with a 2-year bond, when you do your tax return at the end of the second tax year, can you allocate half of the final interest to each year? [Of course, you would need to submit an amended self-assessment for Tax Year 1.] Do HMRC allow this (or something like it)?
Reply to
Ian Jackson

If you want to spread the tax, I think you need to buy half your two year bonds one year and half the next year.
Reply to
David Woolley
As regards building society fixed rate bonds, for example, that generally isn't true at all. Interest is paid annually. Inflation-linked bonds are a bit different. They normally pay at the end of the term because it's only then that the interest can be calculated.
Other sorts of bonds may only pay at the end of the term, but you'll have to look at the terms and conditions to be clear.
Interest is taxable in the financial year in which it's received.
True. So read the small print, and choose the best for you.
Not as far as I know.
Reply to
Norman Wells
Not necessarily. I have, in the past, purchased fixed term bonds where the terms and conditions give the interest payment dates, usually on the anniversary date of openeing.
brightside S9
Reply to
brightside S9
"Norman Wells" wrote
That's correct, and the BS reports the interest paid to HMRC, so if you don't tell them about the investment till it matures (which is what most people would do, as they get no interest statements during the term) then IF you are a higher rate taxpayer HMRC are likely to "look at you" because you are under-declaring your income.
It is a pretty unsatisfactory situation.
Reply to
Postman Pat

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