I'm not sure if my bank reward account income should be included as interest received?

Gemma Newstead
Gemma Newstead

I know I’m close to the personal savings allowance and also higher rate taxpayer so I don’t want to be caught out, asks Mrs E of Bexhill

Gemma Newstead says: This is a great question and one that comes up regularly with clients.

Bank accounts that pay rewards for banking with them or cashback discounts can cause confusion for taxpayers like yourself.

Firstly, the Personal Savings Allowance (PSA) is an allowance you may get, of up to £1,000 of interest, tax-free, depending on which Income Tax bandk you fall into. If you are a basic rate taxpayer, you can earn £1,000 tax free. If you are a higher rate taxpayer, you can earn £500 tax free.

The allowance covers interest received from bank and building societies, payment protection insurance (PPI) interest pay-outs, government bonds and savings/credit unions. Interest received from Individual Savings Accounts (ISA’s) are already tax-free and do not count towards your allowance.

Secondly, many banks offer incentives for customers, new and old, to bank with them. The tax treatment of rewards depends on the nature of the reward

Currently, the three main possible tax treatments are:

If the reward is based on your bank account balance, this is probably classed as interest and is eligible for PSA.

If the reward is for regular banking, say £5 per month, this is probably classed as an annual payment and the bank should deduct tax of 20% at source. This is not eligible for PSA.

If the reward is for regular banking and there is a fee for running the account. The reward isn’t classed as an annual payment but a miscellaneous payment. It is still taxable and is not eligible for PSA; so this must go on your tax return and tax would need to be paid on the amount received.

If the income received is cashback for purchases made on certain cards or for direct debits being set up,; this is currently being classed as a discount to the product or service you have bought, therefore, it is not taxable by HMRC.

Ideally, guidance from your bank should be available as to which category your reward falls into and what the likely tax treatment is.

If you would like to discuss your circumstances, Ashdown Hurrey can advise on this matter in addition to other tax, accountancy and business matters and we also offer free initial consultations. To arrange a meeting or to have a chat please contact Gemma Newstead on 01424 720222 or email her at gemman@ashdownhurrey.co.uk