Gross interest means interest that is paid to the recipient without deduction of tax. In the UK, interest paid by banks and building societies to individuals is paid gross. The majority of UK taxpayers will have no income tax to pay on this income because it will be covered by the savings allowance (also known as the saving nil rate band), which is £1,000 for basic rate taxpayers and £500 for higher rate taxpayers. However, if the individual completes a self-assessment tax return each year, the interest figure must be included even though there may be no income tax due on this income. Any income tax due on the interest received (eg if the individual is an additional rate taxpayer or the interest received in the tax year exceeds the savings allowance) is also reported and calculated via the self-assessment tax return.
Where interest is paid net, this means that the payer withholds income tax at 20% and pays the net amount after tax to the recipient. The income tax withheld is paid to HM Revenue and Customs (HMRC) by the payer on behalf of the recipient, ie the person receiving the interest has suffered the tax, the payer just collects this amount on behalf of HMRC. Interest paid by UK companies to individuals is paid net.
UK companies are not required to deduct income tax on interest payments made to other UK companies. If the UK company makes an interest payment to a non-UK company, it must withhold income tax at 20%.