icesave-fsa statement of fixed rate returns

I, too, have received one of those. What do you intend to do about it, tax-wise? I calculate that if I apply (1+ 0.8*APR)^3, the answer is very near (but, oddly, slightly less) than the sum they say I will get at end of term. I assume that I would have received a tax deduction certificate at the end of each year, stating the interest received and tax deducted, and that I should have entered these figures in my tax form. So, I reason, I should use this sort of calculation to enter a figure, although having no certificate. Is this what you intend to do? Would it be correct so to do? Should one explain this on the form?

If one doesn't do this annually, I am concerned lest the tax rate should increase (likely?), thus applying that rate at the end of term would result in overpayment of tax. Presumably, the sum returned at the end would be less, anyway.

What do you think?

GPG

How much less? Should you have instead applied 0.8*((1+APR)^3-1)+1?

If it's a 3 year fixed term, perhaps interest was never intended to be paid annually, but always as a single lump sum at the end of the

3 year term. That being the case, the entire three years' interest should be declared as interest income only in the tax year in which you receive that single payment, rather than (roughly) a third of it in each of three tax years.

I reckon it would be incorrect to do this.

Tax is generally deducted at the same time as when interest is credited, and so if there is only a single credit at the end of the 3 year term, it is incorrect to pretend that a third of the interest has been credited in each of 3 tax years.

Where interest is credited *more* often than once a year, the tax effect is to give you less net interest at the end of the year than 80% of the APR: Suppose you have an account paying a nominal 4%pa, payable quarterly at 1%. Then tax is deducted quarterly from the 1% payments, and accordingly the end of year net balance will be 1.008^4 (so the effective after tax interest rate is 3.2386%). But the APR would be

1.01^4-1 and 80% of that would be 3.24832%, which is a little more than you'd actually get.

But when interest is credited *less* often than once a year, the tables are turned: Suppose the account pays the same APR as above (4.06040%) but pays out only after 3 years, so that you get credited with 12.68250% at that time. After tax, this would be 10.14600%. But that's not the same as (1+0.8*4.0604%)^3-1, which would be 10.06494%.

Thanks for the reply.

The difference is really very small about 5 in 5000 interest. Applying your formula, which assumes it's all taxed at the end of the period, gives a total of about 60 too much. The trouble with ICESAVE is that the literature received is very sparse. My letter only tells me it's 3 years and what the account number is. Fortunately I know it was 6.5% because I noted in my Money programme.

Now, if I recall correctly, one was invited to have the interest credited monthly or yearly and to one's linked account or to the ICESAVE account itself, and I chose yearly into the account itself. Now, although one could not actually withdraw the money, is this not really much the same owning an accumulation Unit Trust? You receive notification that a dividend has been credited, but you cannot get the money without selling the units, and you still have to declare the dividend to HMRC. A slight snag may be that the FSCS did say that, if you chose to leave the money until maturity, you would not receive any payments from them in the interim as you would have done from ICESAVE (sort of proving that the original deal was to get the credits, even if reinvested, in between). Actually, some interest was reinvested up to the date of the default, which could be another complication.

Not to mention that it seems unlikely that the FSCS will supply a tax certificate even at maturity.

Well ...

GPG