I imagine that we all happily treat any reward received from our banks as interest for tax purposes, and in most instances, this would be correct. However, as with most things tax, nothing is as simple as it first seems.
The main reason for highlighting this is that ‘non-interest’ rewards are not covered by the personal savings allowance (PSA) i.e. the £1,000 tax free band for savings income enjoyed by basic rate taxpayers (£500 for higher rate taxpayers), and so you may need to pay additional tax on them.
I will start with the good news – one off incentives for switching your account to another bank are tax free. These are treated as ‘discounts’. The same applies to cashback on spending.
Straightforward interest will, of course, be treated as such. Banks will pay this without deduction of tax and the PSA will apply. For the majority of people this will mean no further action is required.
The complexity arises when the reward takes the form of a cash reward not related to the account balance. This reward could be given for say depositing £1,000 per month into that account. These rewards are not classed as savings income and so are not covered by the PSA. If you do not pay a ‘fee’ for your account – then this reward is treated as an ‘annual payment’ for tax purposes. The banks should deduct basic rate tax from that reward. If you do pay a fee on your account then the reward becomes classed as a ‘miscellaneous payment’ and the bank may or may not deduct basic rate tax. For both of these you may have tax obligations arising, so it is worth seeking tax advice.
If you have any questions about the above, or other tax matters, please do contact us.