Answer: It’s great that you’re taking advantage of these checking account benefits, but you’re right to consider the possible tax implications, as cash back and reward payments are not treated the same as savings interest, which can be confusing.
Let’s start with the rules on savings interest. Thanks to the personal savings allowance, the vast majority of savers do not have to pay tax on the interest they receive. You can earn up to £1,000 a year tax free if you are a basic rate taxpayer, or £500 a year if you are a top rate taxpayer (there is no allowance for taxpayers at the additional rate). This covers interest from bank accounts and building societies, savings accounts and credit unions, corporate bonds and government bonds.
But the £5 you receive each month from your Halifax Reward account is not considered savings income. This means that it is not covered by the personal savings allowance and is therefore taxable. Halifax automatically deducts 20% basic tax before making these reward payments (so gross monthly reward is £6.25).
If your income is less than £12,570 (in other words, you pay no income tax), then you can claim that £1.25 per month from HMRC. Conversely, if you are a higher rate or additional rate taxpayer, you may have to pay additional tax on your reward payment. If you already file a tax return, you can record reward payments here. Alternatively, you can contact HMRC directly for advice.
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As for the Santander 123 account, the cashback it offers on certain bills (capped at £5 per month for each of its bill categories) is treated as a reduction of your original bill and is therefore not taxable. The same goes for the cashback offered by Halifax and Santander when you shop at certain retailers.
Interest paid by Santander on his 123 account (one per cent on balances up to £20,000) is covered by your personal savings allowance. The maximum you can earn is £200 a year, which is well below the tax exemption limits for basic taxpayers and higher rate taxpayers.
Other readers who like the sound of benefits offered by these accounts should be aware that now is a particularly good time for a change. Halifax is paying £150 to attract new customers (until September 5), while Santander is offering £175.
These are great feedbacks for what is a very simple process: the change only takes seven business days and the new provider takes care of transferring your balance and regular payments.
As with any change offer, you must meet certain criteria. You will need to use the current account switching service, which involves closing your old account. With Halifax, you’ll need to defer at least two active direct debits as part of the change, while Santander requires you to set up at least two active direct debits and pay £1,000 within 60 days of the change.
Keep in mind that the Santander 123 account has a monthly fee of £4 and requires you to pay at least £500 per month. Halifax charges £3 per month for its Reward account, but this is waived if you pay at least £1,500 per month.
And just to be clear, these switching incentives are not taxable.