Many of you will have a current account that rewards you with a monthly payment for paying in a certain amount each month or for having a set amount of direct debits. Other accounts offer cashback for spending. You may have even received a cash incentive for switching accounts.
But do you know what type of income these payments are and how they are taxed if at all? If not read on. In fact you may want to read on anyway…
Let’s start with the positives. The good news here is that the cashback you receive for spending continues to not be taxable as does the cash received on switching accounts. Neither is reportable on your tax return.
Many people will think that the monthly reward they receive is interest. Why? Up until 5 April 2016 you were rewarded by your bank for putting your money on deposit. The bank deducted tax at 20% and you were issued with a certificate of interest at the end of the year.
Often they will have included this income in Box 1 on page 3 of their tax return, blissfully unaware that this was in fact the wrong place to put it.
However, reward payment is not actually interest. It may have all the characteristics of an interest payment but HMRC characterise this as an ‘annual payment’, even though it may be received monthly.
From 6 April 2016 the new Personal Savings Allowance was introduced whereby the first £1,000 of interest an individual receives (£500 if they are a higher rate taxpayer) in a tax year is tax-free.
As bank rewards are not interest and are annual payments they do not qualify for the Personal Savings Allowance and are therefore taxable in full.
Banks are obliged to continue deducting 20% and issue a tax certificate at the end of the year. Confusingly, the certificates issued from banks may still continue to be headed up as a ‘Certificate of interest’.
This issue is a general reminder of the importance of knowing the true character of something before putting it in your tax return. It also points to the advantage of receiving interest rather than ‘annual payments’ wherever possible.
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