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.

The most common forms of interest are the amounts paid by banks or building societies on deposits, but interest may also be paid by companies. The interest will be paid either gross (no tax deducted) or net (after tax has been deducted) and the amounts are reported in different boxes on the Tax Return. This is discussed further in the Interest received net or gross guidance note.

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