Some clients may have already sent you their tax papers for 2016/17, so last week we examined two issues that crop up on relatively simple tax returns; employee expenses and tax deducted by banks. We also had a quick reminder of what donations a company is permitted to make and whether they are tax deductible.
Below we share just part of one of the above 3 tax tips – see the side boxes on this page to learn how you could subscribe to receive the full 3 tax tips every week.
Tax deducted by banks
Since 6 April 2016 interest paid by most deposit takers: banks, building societies and NS&I, should be have been paid without tax deducted. This doesn’t mean you can ignore the interest certificates issued by deposit takers, as the interest must be declared on the taxpayer’s SA return.
The interest is taxable, if it is not paid out of an ISA account, but in most cases the tax rate will be 0%. This zero rate applies where the interest is covered by the taxpayer’s personal savings allowance of £1,000 (£500 for higher rate taxpayers), or their savings rate band of £5,000. Additional rate taxpayers are not entitled to a savings allowance.
It’s worth noting that many PAYE codes for 2016/17 and 2017/18 have not taken account of the available personal savings allowance or savings rate band, and have incorrectly set the taxpayer’s personal allowance against estimated amounts of interest received. Such taxpayers should be due a tax repayment if the personal allowance could have been set against taxed employment income.
Look closely at the bank interest certificates, as those issued in respect of payments into “reward” current accounts may have basic rate tax deducted for 2016/17. The “reward” paid by the bank is not interest, so it can’t be paid gross, and it is not covered by the personal savings allowance or the savings rate band. The reward is an annual payment and it should be declared on the tax return under “other income”, with the tax deducted also reported. A higher rate or additional rate taxpayer will have more tax to pay on such a “reward”.
Confusingly cash-back payments are not “rewards” and are not interest either. They do not have to be reported on the tax return if the cash-back is paid in respect of a personal account. However, if the cash-back is received on a business bank account (which is unlikely), it should be declared as part of the trading receipts (see BIM100210). The bank concerned should issue guidance as to the tax treatment of its current account rewards or cash-backs.