Bank and building society interest - Example 4

In the following examples the investor is under 65, has no income other than building society interest, and has completed form R85 for interest to be paid without tax taken off.

Sydney invested £40,000 in a term bond on 1 May 2007 which lasted one year and matured on its' first anniversary - 1 May 2008. On 1 May 2008 interest of £4,000 was paid to Sydney. The interest was taxable in the tax year 2008-2009 because this is the tax year in which it was paid. Sydney did not need to pay any tax because his total income for the tax year 2008-2009 was below his personal allowance of £6,035.

Jane invested £40,000 in a term bond on 1 May 2006 which lasted two years and matured on its' second anniversary - 1 May 2008. The interest on this bond is credited to Jane's account on two dates - 1 May 2007 and 1 May 2008. On 1 May 2007 interest of £4,000 was credited to Jane's account. Jane did not need to pay any tax because her total income for the tax year 2007-2008 was below her personal allowance of £5,225. Jane chose to leave this interest in the account because future interest would now be calculated on the original deposit of £40,000 and the interest of £4,000. The second payment of interest, £4,100 was paid to Jane on 1 May 2008. Jane did not need to pay any tax because her total income for the tax year 2008-2009 was below her personal allowance of £6,035.

Julie invested £40,000 in a term bond on 1 May 2006 which lasted two years and matured on its' second anniversary - 1 May 2008. The terms were for no interest to be paid or credited until maturity. On 1 May 2008 interest of £8,000 was paid to Julie. The interest was taxable in the tax year 2008-2009 because this is the tax year in which it was paid. Julie is liable to tax because the £8,000 she received in interest is more than her personal allowance of £6,035. Julie should not have completed a form R85 for this account. Julie should contact her local tax office in order to pay the tax now due.