Question to the HM Treasury:

To ask the Chancellor of the Exchequer, what steps he is taking to ensure consistency of collection of tax on the interest of savings that are not due until maturity of the savings bond.

The taxation of interest arising on savings bonds depends on the terms and conditions applying to each and may differ as not all savings bonds are the same.

Income tax is charged on the full amount of interest ‘arising’ to a person in a tax year and interest normally ‘arises’ when the amount is received or is credited to an account on which the holder is free to draw.

The terms of a savings bond may be that interest is credited each year and, once credited, the bondholder is able to draw on it. In this case, the interest arises each year and is taxed each year as it is credited.

On the other hand, it is possible that interest may be credited each year, but the terms of the bond may mean the bondholder cannot draw on it or benefit from it until the end of the term. In that case all the interest paid on the bond would be regarded as ‘arising’ when it became available to the bondholder on maturity of the bond.

This long-standing position is explained in HMRC’s guidance at SAIM2440, and there have been no recent changes.

In either case, to the extent that the interest arising in any year is not covered by personal allowances, such as the Personal Savings Allowance, the tax will be collected in the same way, usually through a taxpayer’s PAYE code or a self-assessment tax return.