Three key questions about multi-year fixed rate savings bonds

Desk

I'm currently looking at multi-year fixed rate savings bonds, and I'm wrestling with three main thoughts...

1) If I have the interest paid back into the savings bond annually, do I have to plan ahead to make sure that the total doesn't exceed the FCSC protected limit of £85,000 before the account matures?

2) Am I better having the interest paid back into the account, or paid into an external account?  I suppose that depends on what happens to the base rate and resulting offers during the course of the multi-year bond? If I have it paid into the bond, then I'm compounding the interest at a guaranteed rate instead of it coming out and not being able to find much of a return on it. I'm wondering, if I don't need access to the interest until the account matures, whether on balance I'm better off compounding within the bond?

3) Oh, and at what point is tax paid on multi-year savings bond? Is it annually, because if it's only paid once the savings bond matures then you would be better to have the interest paid into the bond and get the benefit of compounding it before it's taxed?

Any thoughts on this would be most welcome.

25_Years_On

1. Yes

2. Depends if you have a need for the money for instance as income.

3. Tax is payable in the year the interest is paid where or not it's compounding.

Notepad_Phil

Point 3 has seen a bt of discussion on this board recently (or possibly the Banking, Pension or Cutting Tax boards). The answer from a strict reading of one part of the hmrc manual would indicate that if you are not able to access the funds in the account (even under penalty) and the interest is paid into the account then all of the interest is taxable in the maturing year of the account.

However from the accounts I've had, and seemingly from others too, this has never happened apart from a few accounts that tell you upfront that all of the interest is taxable in the maturing year. Which makes sense if you read other parts of the hmrc manual.

Whether this matters to you will likely depend on how much money you will be putting in, but if you want to guarantee that you won't find yourself having to deal with a large sum of interest all being treated as being paid in one tax-year then opt for annual or monthly payments out of the account.

Daliah

It's not FCSC but FSCS btw https://www.fscs.org.uk/

Bigwheels1111

1, 80k max at 55 or 6%.
2, Interest paid away, then reinvest elsewhere.
3, then tax will be on a year to year basis.
Thats what I’m opting for.
If interest is over 10k a year a tax return must be filed.