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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.

For further discussion of the meaning of interest, see Simon’s Taxes E1.405.

Unless the interest is specifically exempt (see ‘Exempt interest’ below), it is taxable. This is explored further in the Taxation of savings income guidance note.

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.

This guidance note discusses whether the interest is either paid to the recipient gross (no tax deducted, also known as untaxed income) or net (after tax has been deducted, also known as taxed income).