Interest can best be thought of as compensation for the use (or retention) by one person of a sum of money which belongs to another. Therefore, in order for a payment to be interest, there must be a principal sum on which the interest is calculated and both amounts (the principal and the interest) must be due to the same person.

See Simon’s Taxes E1.405.

The most common forms of interest are the amounts paid by banks or building societies on deposits, although interest may also be paid by companies on amounts loaned by the person. The interest is either paid gross (no tax deducted) or net (after tax has been deducted) and the amounts are reported in different boxes on the tax return (see below).

Irrespective of whether a person receives the interest gross or net of tax, it is the gross amount that is used to calculate the tax due. After the overall tax liability has been calculated, any tax already