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Are bank incentives increasing your tax bill?

In recent times, you may have heard of incentives to switch your bank account to a new bank provider and receive a cash bonus up to £175 (Dec 2022). Great news, get cash for pretty much nothing, as the new bank provider will switch over all your direct debits for you, you may just need to let your employer and others know of your new details for your salary to be paid into.

But what about tax on these incentives? HMRC view this payment as a ‘one off’ bonus and therefore it is not taxable income and doesn’t need to be included in your personal tax return.

However, some accounts that you switch to also offer a monthly bonus, and this is where things get a little sticky.

When are their tax implications?

Generally, the monthly amount is taxable income and income tax is deducted at source at 20%. For example, if you receive a £5 monthly reward from your bank, they have paid £6.25 and deducted £1.25 in income tax at source.

This may be all well and good if your earnings are attracting basic rate tax, which is 20% tax paid on your earnings that exceed your personal allowance. However, what if you earn more and fall into another income tax rate category? What are the sticky situations there?

If your income is below the personal allowance, then you will need to claim this tax back each year – easy to do if you complete a tax return, not so easy if you don’t. The amount for the above example for a tax year is £15 – may not be worth the hassle, but if you have several of these types of accounts it will make it more worthwhile.

If your income takes you above the basic rate and into the higher or additional tax rates, then you need to declare the monthly rewards and pay the additional tax on them – the difference between the 20% already deducted and the current 40% or 45% at higher or additional rates.

You could, therefore, be due to pay £15 or more for each bank incentive that you have. Worth thinking about the benefit provided by the bank and if it’s worth this additional tax to pay.

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