What is interest?
What is interest?

The following Tax guidance note provides comprehensive and up to date legal information covering:

  • What is interest?
  • Case law definition of interest
  • Premium
  • Discount
  • Guarantee payments
  • Accrued interest
  • Damages or compensation payments
  • Alternative finance return
  • Funding bonds
  • Interest recharacterised as a distribution
  • more

Interest is an important concept in UK tax law. Specifically, an obligation to withhold UK income tax applies to payments of certain types of interest, for which, see Practice Note: UK withholding tax on yearly interest.

Note that, since 6 April 2016, the tax deduction scheme for interest (TDSI) has not applied. Broadly, before 6 April 2016, the TDSI required a bank or building society (ie a deposit-taker) to deduct UK income tax from interest paid or credited before 6 April 2016 in respect of a deposit to a UK resident individual, an individual's personal representatives or trustees. For interest paid or credited on or after 6 April 2016, in addition to the abolition of the TDSI (which was given effect by removing section 851 of the Income Tax Act 2007 (ITA 2007)), an express exemption ensures that there is no obligation to withhold UK income tax under ITA 2007, s 874 (ie the obligation to deduct UK income tax from a payment of yearly interest) if the interest payment is made by a deposit-taker and the investment is a 'relevant investment' (ie a deposit with a deposit-taker where the person(s) beneficially entitled to the interest is/are individual(s)).

This Practice Note:

  1. sets out the meaning of interest, and

  2. discusses this meaning in the context of various types of payments, such as:

    1. premiums

    2. discounts