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HMRC internal manual

Savings and Investment Manual

Interest: introduction

This section of the Savings and Investment Income Manual explains the taxation of interest received by individuals and trustees. It covers the legal definition of interest, inclusions and exemptions from the statutory charge, and explains who is chargeable. It also covers the sale of interest rights.

The charge to tax

There is no statutory definition of ‘interest’. In most cases, it is readily apparent that someone has received interest. The charge to income tax on interest is contained in Chapter 2 of Part 4 of ITTOIA05 at section 369, which includes the following.

  • Interest from UK bank, building society and other savings accounts
  • Interest on gilts, and on other securities issued by governments or companies
  • Interest on loans made privately to individuals or companies
  • Interest received on delayed payments or refunds
  • Interest received by UK residents on bank accounts, securities or other investments situated abroad.

Years before 2005-06

For years of assessment before 2005-06, interest was taxable on individuals and trusts under Case III of Schedule D. ICTA88/S18 (3) brought into charge

  • interest of money (whether yearly or otherwise),
  • annuities or other annual payments, unless are already chargeable under Schedule A,
  • discounts,
  • income from securities which is payable out of the public revenue of the United Kingdom or Northern Ireland.

Discounts are now simply taxed as interest by ITTOIA/S381 (see SAIM2220). Annual payments are now taxed separately under Part 5 of ITTOIA05. See the guidance at SAIM8000.

A separate Case III charge to corporation tax remains at ICTA88/S18 (3A). Interest and discount received by companies fall within the loan relationships rules, on which there is guidance in the Corporate Finance Manual at CFM30000 onwards. The guidance in SAIM does not apply to companies.

Deduction of tax from interest and the duty to notify a new source

Tax due on interest is frequently collected by requiring the payer of the interest to deduct income tax. For example, individuals who are liable to tax will generally receive interest on bank or building society accounts net of tax. Many investors will receive all of their interest with tax taken off. If someone receives untaxed interest in a tax year, and has not been required to complete a tax return for that year, they must tell HMRC about the new source of income before 5 October following the end of that tax year.

SAIM9000 onwards explains the requirement to deduct tax.