CFM75020 - Other tax rules on corporate finance: deduction of tax: TSDI: overview

Tax Deduction Scheme for Interest

The obligation to deduct tax from interest payments by deposit takers was repealed from 6 April 2016. This guidance applies only to periods before 6 April 2016.

Interest paid by banks, building societies and other deposit takers on customer deposits must operate the Tax Deduction Scheme for Interest (TDSI). The broad effect of the scheme is that individuals who are UK taxpayers will receive interest net of tax at the basic rate. This means that only higher rate taxpayers have any further tax liability, and significantly reduces the number of people who need to complete self assessment returns. On the other hand, non-taxpayers may register to receive interest gross, reducing the need for people with low incomes to claim back tax from HMRC.

The main features of TDSI are:

  • It applies to deposit takers, which includes banks but also extends to other types of financial businesses.
  • It applies to ‘relevant deposits’.
  • There is provision for gross payment to depositors who have registered as non-taxpayers.
  • Tax is deducted at the basic rate. The deposit taker accounts for the tax to HMRC through the mechanism in ITA07/PT15/CH15.
  • The tax must be deducted when the interest is paid - this includes crediting interest to an account.
  • The depositor has a statutory right to a certificate showing the tax deducted from their interest.
  • HMRC both audits the Scheme to ensure that deposit takers are complying with their obligations, and extends help to new deposit takers or where there are particular areas of difficulty.

In addition, HMRC may issue notices to banks, building societies and other deposit takers, either under TMA70/S17 or TMA70/S18 (which applies to payers of interest generally) requiring returns of interest paid, whether or not tax has been deducted. Detailed guidance notes are available on the HMRC Internet site to help recipients of such notices comply with the reporting requirements.