'Reward' current accounts face major tax blow

Hundreds of thousands of current account holders will miss out on a tax break that others are getting.

Many current accounts offer rewards that mean they out-perform traditional savings accounts. Some, such as Santander, Nationwide and TSB, pay interest on the balance of up to 5%. Others, such as Halifax, Barclays and Co-op Bank, offer cash rewards of up to £7 a month.

Thanks to the new personal savings allowance introduced in the last budget, all savers can now earn up to £1,000 of interest a year tax-free.

But while bank customers whose reward comes in the form of interest payments will benefit from this allowance, those that get a fixed monthly sum won't.

That's because, says HM Revenue & Customs, the fixed amounts count as annual payments rather than interest, and are therefore subject to tax.

"Annual payments are not covered by the personal savings allowance, so banks and building societies will continue to pay them after basic-rate tax has been deducted," it explains.

In other words, the £1.75 tax on a £7 reward will continue to go to the Treasury, rather than the saver.

Most bank customers will have opened their current accounts before the introduction of the personal savings allowance and will have seen the two types of reward as roughly equivalent.

"These bonuses are rewards for putting money on deposit at a bank just like savings interest - so it's a harsh blow," Ian Millward, of independent advisers Candid Financial Advice, tells This Is Money.

The introduction of the personal savings allowance has also meant that many people with ISAs are questioning whether they might be better off putting their money into a current account.

While there are pros and cons on both sides, it's now clear that interest-bearing accounts will be better for tax purposes than those giving rewards.

But the Competition and Markets Authority (CMA) has this week expressed concern that, in general, charging structures for current accounts are so complicated that it's hard for customers to compare them.

It's recommending that banks should be made to show customers the best deal for their particular circumstances.

"We believe the strong and innovative package of measures we are proposing will give customers the information and tools they really need to get a better deal out of the banks," says Alasdair Smith, Chair of the Retail Banking Investigation.