Cashback deals to be taxed

Inheritance Tax the Basics

HMRC has stirred up a hornets’ nest by ruling that cashback on certain investments will be taxed from now on. What’s the full story?

Return payment. What started out as a seemingly minor HMRC announcement has become the source of misleading articles in the national press. The trouble concerns cashback payments by financial advisors, investment managers, etc. to individuals who invest through them in savings products, including pensions. HMRC has been looking at these closely for a while and has now decided they are taxable.

Which payments? The payments mainly affected are annual commission or management fees paid by investment companies to the financial advisor etc. Some of this money is passed to customers, usually as an incentive to invest. HMRC now considers that this type of payment as a return on investment, similar to, say, interest, and so should be taxed.

Scaremongering. At least one national firm of financial advisors has suggested that HMRC might extend the tax treatment to cashback or loyalty bonuses for credit or store cards. This story was picked up and reported by the press; however, HMRC has dismissed the suggestion. We also take this view. Retail loyalty schemes and investment cashbacks are entirely different.

Tax charge. Since April 6 basic rate tax is deducted by investment companies from cashback payments. However, HMRC says that even though, in its view, the cashback has always been taxable, it won’t look back to earlier years.
Tip. It will be easy to spot if you’re affected by the new tax charge; your financial advisor etc. will send you details of any taxable payments. You must declare the income at Box 16 and the tax deducted in Box 18 on tax return Form SA100 or the online equivalent.