How the tax rules now work on savings and current accounts

Not sure what you need to declare to the taxman? Here's a simple guide.

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Personal Savings Allowance: what is taxable?

The tax-free Personal Savings Allowance (PSA) was introduced in April, meaning you can now earn tax-free interest not only from ISAs but from savings accounts and current accounts too. But what are the tax implications for current account rewards such as cashback and switching bonuses?

Here are the facts when it comes to income tax on everything from interest to cashback to reward payments.

What comes under the Personal Savings Allowance?

Since April 2016, basic rate taxpayers have been allowed to earn up to £1,000 in savings income tax-free, while higher-rate taxpayers get a £500 allowance. This is all on top of the annual ISA allowance.

But HMRC says not all payments made by banks and building societies are savings income, so would not necessarily fall under the Personal Savings Allowance.

According to HMRC guidance, if you receive annual payments that are non-interest then the basic rate tax will be deducted at source. If an individual is not liable to tax they can reclaim any tax deducted by completing an R40 form or on their self-assessment tax return.

If you are a higher-rate taxpayer you would need to pay the extra amount through your tax return.

An HMRC spokesman told us: "In general HMRC would only expect the payments to be annual payments if they can continue for more than a year and the customer does not pay a fee for holding the account.

"This means that one-off payments or monthly payments that last less than a year are not annual payments. Because annual payments are not covered by the PSA, banks and building societies will continue to pay them with basic tax deducted."

But even if your rewards are not annual, you could still be taxed if you get monthly cash rewards as these may fall under the HMRC definition of 'miscellaneous payments'.

This creates more admin and confusion as miscellaneous payments don't have tax automatically deducted, so basic and higher rate taxpayers would have to disclose this on a self-assessment form.

So which products are really tax-free?

Savings accounts

Let's start with a relatively straightforward one. All savings interest up to £1,000 for basic rate taxpayers and £500 on the higher rate falls under the PSA. Anyone earning above the threshold would need to complete a self-assessment tax return.

Current accounts

Any interest you earn on current accounts would come under the PSA.

So for example you could open TSB's Classic Plus Account paying 5% on balances up to £2,000, or a Santander 123 Current Account and get up to 3% on balances between £3,000 and £20,000 tax-free as long as your income from all bank accounts is below the Personal Savings Allowance.

Several banks and building societies offer cash incentives for people switching their accounts. This is considered a discount so wouldn't be taxed, according to Moneyfacts.

Additionally, some providers will offer you cashback or rewards on certain types of spend. As these are also classified as a discount they aren't taxed.

Personal Savings Allowance: what is taxable?

It gets confusing when a current account makes regular cash payments as these can be treated as annual or miscellaneous payments, so they would be subject to tax. For example, Halifax offers a well-publicised £5 reward on its Reward Current Account for each month you have two direct debits set up and pay in a minimum of £750 or more.

The reward is actually worth £6.25 a month, it's just that the taxman has already taken a 20% cut before it arrives in your account.

Barclays has a similar offer on its Blue Rewards Current Account, except the taxman's cut has not yet been taken.

Customers can receive certain monthly monetary awards such as £7 for banking regularly and up to £3 a month for taking out its own protection products.

The £7 is liable for income tax, meaning you only actually get £5.60 a month. Strangely, the other rewards are not subject to income tax.

Ultimately you will need to check the terms and conditions of the current account, just to be 100% sure.

Which current account perks are taxed?
Type of reward/offerExamples of accounts that offer itIs it taxable?
Interest on savingsTSB Classic Plus Account; Santander 123 Current AccountNo (up to PSA limits)
Account switching incentivesFirst Direct 1st Account; M&S Current AccountNo
Casback/rewards on spendingSantander 123 Current Account; NatWest Reward Platinum AccountNo
Regular cash paymentsHalifax Reward Current AccountYes

Compare rewards on current accounts

Credit cards

Plenty of credit card providers will offer rewards for spending.

It is possible to get up to 5% cashback with some credit cards such as American Express or Clubcard points with Tesco. This cashback is classified as a discount so doesn't fall under the PSA but also is not taxable.

Compare cashback credit cards

Cashback websites

From TopCashback to Quidco, cashback websites are a popular way to earn money on your shopping. Quidco claims you could earn up to £252 a year from cashback.

The taxman isn't too worried about this either and any money you receive is treated as a discount, so there's no tax to pay.

Investing platforms

Platforms such as Hargreaves Lansdown or Fidelity may sometimes offer cashback to lure investors in or to cover transfer costs.

Similar to a cashback website, these are treated as discounts so would be given free of tax.

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