Interest: interest payable from the Financial Services Compensation Scheme: examples
examples of FSCS Compensation Calculations
Ms C has a savings account with Bank D which pays interest on the 30th June each year. In June 2008 Ms C receives £600 interest after deduction of tax at 20% (£750 interest gross). Bank D is declared in default on the 31st October 2008 and the FSCS accepts that Ms C has a valid claim. Ms C’s balance with Bank D consists of her principal of £20,000 plus the net interest paid by the bank in June of £600. In addition the FSCS includes in the total compensation it pays to Ms C an amount equal to the net interest that Ms C would have received from the 1st July to the 31st October. This is £200 net (which would be £250 gross) and so the total compensation received by Ms C is £20,800.
In this example Ms C is chargeable to income tax on the gross interest she has received from the bank and FSCS (£750 and £250 respectively). However if she is a non-taxpayer she can make a repayment claim of £200 to HMRC for the tax deducted by both the bank and FSCS. If she is a basic rate taxpayer there is no further tax to pay and if a higher rate taxpayer then she will be chargeable to higher rate tax but can set against this the £200 tax deducted by the bank and FSCS.
Mr E has a fixed term deposit with Bank D of £80,000 which he placed with the bank on the 20th October 2008. The interest rate is fixed at 5% a year and the deposit is due to mature on the 19th October 2011. The FSCS accepts that Mr E has a valid claim for compensation but gives him the option of continuing his deposit until maturity and receiving his compensation on the 19th October 2011 rather than on the date that the bank went into default. A condition of this option is that the interest is payable on maturity. The FSCS will pay compensation on maturity equal to his £80,000 deposit plus the 5% interest that the bank would have paid. On the maturity date Mr E, who is a higher rate taxpayer, receives compensation of:
|Interest to 19th October 2009||Gross £4000 less 20% ‘tax’||£3,200|
|Interest to 19th October 2010||Gross £4160 less 20% ‘tax’||£3,328|
|Interest to 19th October 2011||Gross £4326 less 20% ‘tax’||£3,461|
|Total Compensation||Paid on 14th November 2011||£89,989|
The gross interest element of £12,486 is chargeable to income tax as interest arising the year 2011/12. The £2497 ‘tax deducted’ from the gross interest will be treated in the same way as tax deducted from bank or building society interest. The amount actually received by Mr E that represents interest net of tax is £9,989.
Mr F has a savings account with Bank F which pays interest on 1 April each year. Bank F is declared in default on 1 June 2010 and the FSCS accepts that Mr F has a valid claim. Mr F’s balance with the bank on 1 June was £75,000 and in addition the FSCS includes in the compensation calculation an amount equal to the net interest that Mr F would have received from the 1s t April to 1s t June. This was £1,000 net (£1,250 gross).
Mr F is potentially due £76,000 (£75,000 balance plus £1,000 net interest) however, on 1 June 2010 the FSCS’s maximum level of compensation is £50,000 so Mr F’s compensation is capped to £50,000. This is first set against his balance of £75,000 and as the compensation is less than his balance we consider that no interest is actually paid.