'Capitalise Interest' - Simple explanation please

SevenOfNine

OK, so I'm trying to open a 2 year fixed interest deposit a/c with Clydesdale Bank. 4.00% interest £20,000 (that rate dropped in the last few days from 4.08%). No early closure or w/d's. ........and if anyone has any better suggestions they'd be welcome.

I'm confused with the interest payment options, can't see which (if either) of the choices is better, even with the application explanation I'm still confused.

Capitalised annually and paid at maturity
OR
Capitalised at maturity.

What difference does it make, won't the end interest in 2 years be the same for either option?

calypso_rhapsody

The total gross amount of interest you receive will, i believe (unless they've changed the AER too since i last looked), be the same whichever you choose. What will differ is when you receive it and therefore when the interest is taxed. If you go for the annual interest then the money will be 'received' each anniversary and taxed in each tax year ...if you go for the maturity interest you will 'receive' it at the end of the 2 years and it will be taxed then. Which is better depends on your tax position and your view as to whether future tax rates will increase or decrease. For most people, unless they expect their income to drop (retirement maybe) or they think income tax rates will drop (?) the annual interest option will probably be best.

SevenOfNine

Thanks so much Calypso, NOW it makes sense. Annually it's going to be.