Many UK banks now tempt customers with cashback, monthly rewards plus generous switching incentives. Consequently, these offers can put extra money in your pocket, but they do not all receive the same tax treatment.
For this reason, understanding How bank cashback and reward payments are taxed will help you avoid unexpected tax liabilities and ensure you report taxable income correctly.
Overview of How bank cashback and reward payments are taxed
Whilst many popular cashback payments remain completely tax-free. some monthly bank rewards are taxable. Nevertheless, many people assume these payments are tax-free.
Ultimately, how bank cashback and reward payments are taxed depends on the type of payment received.
With this in mind, the starting point is to determine exactly what your bank has paid you. Broadly speaking, banks make two different types of payments:
Although these payments might appear similar, HMRC treats them very differently. Consequently, this distinction can significantly affect your tax position. In addition, HMRC's guidance indicates that some recurring reward payments may qualify as taxable annual payments.
Cashback payments usually remain tax-free
Generally speaking, most cashback payments simply reduce the cost of something you have purchased. For example:
Because these payments represent a discount rather than income, they are generally not taxable for personal customers. Indeed, HMRC also confirms that ordinary cashback does not normally generate a Capital Gains Tax liability.
For example, suppose your bank offers:
In short, neither payment would normally be considered income subject to Income Tax.
Reward payments may be taxable
Notably, the position changes where your bank pays you a regular reward simply for operating the account.
For example, your bank might pay you £6 each month if you:
By contrast, unlike cashback, these payments do not reduce the cost of anything you buy. Instead, HMRC generally treats them as annual payments, meaning they become taxable income unless a specific exemption applies.
Unsurprisingly, this catches many taxpayers by surprise because the payments often appear alongside ordinary banking transactions.
Does the Personal Savings allowance apply?
One common misconception involves the Personal Savings Allowance.
For example, many people wrongly assume these monthly rewards are covered by the allowance because banks pay them into current accounts. In reality, that is not the case.
More importantly, the Personal Savings Allowance only covers savings income such as bank interest. Accordingly, reward payments are not taxed as savings income.
Therefore, they do not benefit from:
Therefore, the rewards remain taxable under separate income tax rules.
Are bank cashback and reward payments paid net or gross?
At the same time, another important point when considering How bank cashback and reward payments are taxed concerns whether the bank deducts tax before making the payment. In most cases, the answer usually depends on whether your account charges a monthly fee.
Accounts with no monthly fee
In fact, where your account does not charge you a monthly fee, banks often treat reward payments as annual payments. As a result, they usually deduct basic rate tax before paying you.
For example:
However, if you pay higher or additional rate tax, you may need to pay further tax through Self Assessment or a PAYE coding adjustment.
Conversely, if your income is covered by your Personal Allowance, you may be able to reclaim the tax HMRC deducted.
Accounts with a monthly fee
Some premium current accounts charge a monthly subscription. Where this applies, HMRC usually treats the reward payment as miscellaneous income instead.
With this in mind:
Consequently, basic, higher and additional rate taxpayers may all have income tax to pay on these reward payments.
Practical examples
Two customers each receive monthly bank rewards.
Customer A
Consequently, the customer actually receives £72 during the year (after tax), though the gross taxable income equals £90.
Customer B
As a result, the customer receives £120 during the year, and the full £120 remains taxable. Even though both customers receive bank rewards, their tax reporting obligations differ because their payment structures differ.
Summary
In summary, whilst banks continue introducing attractive incentives to win new customers, not every payment receives the same tax treatment.
Ultimately, understanding how bank cashback and reward payments are taxed helps you to distinguish between tax-free cashback and taxable reward payments. Equally importantly, it also helps you identify whether the bank has already deducted tax or whether you need to declare the income yourself.
Finally if you receive regular bank rewards, particularly from several different accounts, reviewing their tax treatment annually can prevent unexpected liabilities. At the same time, it will ensure you remain fully compliant with HMRC.
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