Something of interest – or is it?

Something of interest – or is it?

If it looks like a duck, walks like a duck and quacks like a duck, then it probably is a duck. The so-called “Duck Test” suggests you can usually identify an unknown object from its general characteristics. It’s often reliable, but appearances can still deceive.

Female duck - Duck TestTake recent developments in an increasingly competitive market for your banking business. Various incentives now attach to some current accounts, partly because banks hope that you might then buy extra products from them.

These incentives include simple cash credits and access to linked products with special features. Usually there are terms and conditions to meet to actually get the incentive – possibly relating to how much you pay in each month or linking your direct debits – but many people are now getting what they view as free money or a special deal.

But the tax man may be due his cut too. Exactly how that works depends on the specifics of the deal, but it is easily misunderstood. Customers often perceive an incentive to be interest – because it can look like interest. However, that isn’t always correct. It might not be the “duck” you think it is.

Example 1

Your bank gives you a special interest rate, either on money in your current account or via a separate savings account. As the extra money generated depends on an interest rate it is clearly interest. Before 6 April 2016, when savings interest administration changed to make gross payment the norm, tax at 20% will have been deducted at source (unless you had registered using Form R85 to authorise no such deduction). So, in this example, the “Duck Test” works. It appears in all respects to be interest – and it is.

Example 2

Your bank gives you a cash credit each month that depends only on whether you meet certain terms and conditions. The credit you receive usually has an associated 20% tax payment which the bank pays directly across to HMRC. So if you get a £5 credit each month, the bank should separately be paying £1.25 across to HMRC, making a total monthly cost to the bank of £6.25. At no point is there any link to a rate of interest, but the format of the payment, the connection to a bank account and the fact it is being made by a financial institution can make it look like an interest payment on the paperwork you get. However, it isn’t interest – HMRC actually refers to such payments as “annual or miscellaneous payments”. So here the “Duck Test” can be misleading for the unwary.

There’s no need to make any special report to HMRC but the distinction matters if you’re trying to claim the tax back.

Special tax provisions apply where income is interest. Although, since 6 April 2016, most interest is paid without any at-source tax deduction, some people may still need to make a tax reclaim on Form R40 for earlier years or where they see ongoing tax deductions.

In order to use the special Nil Rate Band for Savings (introduced in 2015/16, and relevant to those on low incomes) or the Personal Savings Allowance (introduced in 2016/17, and more widely available) to generate such a refund, you need to be sure you have definitely received interest.

Where you’ve received an “annual or miscellaneous payment” you can only reclaim the tax if your total income is below the Personal Allowance (£11,000 for 2016/17) because that can be used against most income types, not just savings interest. If you are reclaiming on Form R40, these payments go under the “Any other income” section.

So, if you need to get all your ducks in a row, first make sure they really are ducks!

This article is by Tax Help for Older People registered charity no 1102276, offering free tax advice to older people on incomes below £20,000 a year. The Helpline number is 0845 601 3321 or geographical 01308 488066.