What obligation does section 851 of the Income Tax Act 2007 impose on deposit-takers and building societies?

Section 851 requires deposit-takers such as banks and building societies to deduct a sum representing income tax at the savings rate from interest payments made on relevant investments. This ensures that basic tax on savings income is collected at source when the interest is paid, rather than relying solely on the investor to declare it.

How does section 851 treat building society dividend payments for income tax purposes?

Under section 851, the term 'interest' for building societies is given a wider meaning that extends to include dividend payments made to members. This reflects the fact that building society dividends are economically similar to interest payments and should receive the same tax deduction treatment as conventional interest on relevant investments.

How has the definition of 'relevant investment' been aligned between deposit-takers and building societies?

The definition of what counts as a relevant investment for building societies has been brought into line with the deposit-taker regime. This alignment simplifies the framework by ensuring the same types of investment attract the deduction-at-source obligation regardless of whether the institution involved is a bank or a building society.

How does the deduction at source work in practice under section 851?

When a deposit-taker or building society pays interest on a relevant investment, it must deduct income tax at the savings rate before crediting the net amount to the investor's account. For example, on £1,000 of interest, the institution deducts the tax sum and accounts for it to HMRC on the investor's behalf.

Income Tax Act 2007 section 851

Duty to deduct sums representing income tax

Section 851 establishes the general obligation for deposit-takers and building societies to deduct a sum representing the savings rate of income tax from interest payments they make on relevant investments.

Deposit-takers and building societies must deduct income tax at the savings rate from interest paid on relevant investments.
For building societies, "interest" includes dividend payments made to members, not just conventional interest.
The definition of "relevant investment" for building societies has been aligned with the deposit-taker regime, creating a consistent approach across both types of institution.
This duty applies broadly to ensure tax is collected at source on savings income from these financial institutions.

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