“But it is not interest, why do I have to put it on my tax return?”
This was a question raised the other week by a client who was not happy that the reward for banking with a certain bank was taxable income. But not all amounts have to go onto the return. How do you know which ones apply?
Cashback rewards based on spending
The good news here is that if you get cash back from your bank depending on how much you spend, then this is not taxable income.
Bank switching incentives
Great news – these are also not taxable income so does not have to be in the tax return.
Bank Rewards e.g. Loyalty Commission
These types of rewards are given for various reasons, for example, paying a certain amount in each month, having a bank account for a period, setting up direct debits, use of online systems, etc. HMRC see these as annual payments (even though paid monthly) and are not covered by the personal savings allowance (from April 2016) so the bank should be deducting tax from such payments.
So the £5 a month that Halifax pays for meeting its criteria of paying in £750 per month, having two direct debits and staying in credit is £6.25 less 20% tax of £1.25. That means non-tax payers can complete an R40 form and get that tax back. https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/535608/R40_M_internet.pdf
Now – there is an extra twist. Some banks you have to pay a fee for the account that gives these loyalty rewards. For example, Barclays Blue account charges £3 per month for the account, so it is called a miscellaneous payment and not an annual payment. Therefore it is paid gross, and no tax is taken off which means taxpayers need to declare this income and pay tax on it. Pity you don’t get relief for the fee you pay to get the amount!
Is this new?
No – this has been around since banks introduced these incentives, but a significant number of people don’t have issues as they are basic rate tax payers and all interest is taxed. The introduction of the personal savings allowance means that these discrepancies are being highlighted as bank rewards and are not encompassed in this as interest.