Why does tax on reward current accounts have to be so taxing?

09 May 2017

If you are one of the growing number of taxpayers who have switched to a reward current account with one of the high street banks (in an effort to get some return on the cash they hold for you), you may have already received a tax deduction certificate from the bank in question. This shows that the reward payment made to you in the tax year to 5 April 2017 has had basic rate tax deducted at source before you received it.

As has been discussed previously, these reward payments are not considered to be interest and therefore do not qualify as savings income which benefits from the Personal Savings Allowance (PSA) of up to £1,000 introduced from 6 April 2016. Instead they are annual payments which are subject to tax, potentially at the higher and additional rates of tax.

If you are a non-taxpayer, you can recover the basic rate tax deducted at source, but given the small amounts involved (typically less than £20) it seems unlikely that many will bother to do so, to the benefit of HMRC’s coffers.

For those paying tax at higher and additional rates of tax, the reward payment should be included on your tax return together with the tax deducted. The banks will share details of the recipients of these payments with HMRC so an omission could lead to an unwelcome tax enquiry.

The introduction of the PSA was supposed to contribute to the simplification of the tax system, but anomalies like this are more likely to confuse.

Scottish taxpayers, prepare to be more confused.

Since HMRC have confirmed that an annual payment is not savings income, you could be forgiven for thinking that you would pay Scottish rate of income tax (SRIT) on your reward payment and therefore a higher rate of tax than in the rest of the UK if your income this year is between £43,000 and £45,000. However, tucked away in a technical note is a clarification that payments which are subject to a basic rate withholding tax (such as these reward payments) should not be within the scope of Scottish income tax and therefore UK rates will apply.

Does the UK tax system really need to be this complicated?

For more information please get in touch with Shirley McIntosh, or your usual RSM contact.

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