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)?
- posted 7 years ago