Save into shorter-term bonds, or accept higher tax hit?

edited 27 November 2022 at 12:44PM in Savings & investments
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DeskDesk Forumite
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edited 27 November 2022 at 12:44PM in Savings & investments
Hi folks,
My investing is entirely in cash, and I've secured a range of multi-year fixed term bank and building society savings bonds averaging around 5%.
The majority are accounts which allow me to choose between paying out and compounding on an annual basis, and the sum invested allows me to compound across all these years without breaching FSCS.
I've got one at three years and another at four years, but I've got others at a full five years. However, I'm aware that HMRC is generally notified of interest on savings at the point when they become accessible - the majority of this set to be in year five, and with the prospect of this sum lifting me fairly significantly from being in the 41% tax band to 46%.
As I prepare to invest monies, what I'm wondering is whether to try and spread more money into two or three year savings bonds in order to try and avoid going too high into the 46% tax bad in year five. However, if interest rates have dropped back significantly, I would be missing out on the extra interest year five would generate, particularly if compounded.
I'm wondering if the best bet is to stick with the plan to lean towards five years, but to play this on a year-by-year basis. If interest rates remain fairly high, opt to pay out and then reinvest that sum - possibly on a rolling five year plan. If interest rates have fallen by the end of the next financial year, opt to compound the money and take the hit?
In order to mitigate against tax, I can opt to defer a large lump of my salary in 2026/27 into my workplace pension, which would lower the amount rising into the 46% tax bracket, but I won't see the benefit of that money for many years to come.
I appreciate that I'm in a very fortunate position here, but any thoughts on managing this would be much appreciated.

Replies

  • eskbankereskbanker Forumite
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    Desk said:
    My investing is entirely in cash
    Why?

    If you have earnings likely to stray into 46% territory and are looking at locking away huge sums of money for more than five years, then it would probably make more sense to consider actual investing rather than saving.

    Also, are you making the best use of tax wrappers such as ISAs?
  • edited 27 November 2022 at 1:10PM
    DeskDesk Forumite
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    edited 27 November 2022 at 1:10PM
    eskbanker said:
    Desk said:
    My investing is entirely in cash
    Why?

    If you have earnings likely to stray into 46% territory and are looking at locking away huge sums of money for more than five years, then it would probably make more sense to consider actual investing rather than saving.

    Also, are you making the best use of tax wrappers such as ISAs?
    My earnings won’t take me anywhere near 46% by itself - the maturing interest in the multi-year savings bonds will.

    I’m maxed out re ISA, and don’t have an appetite for stocks and shares in the current climate.
  • edited 27 November 2022 at 1:26PM
    Dazed_and_C0nfusedDazed_and_C0nfused Forumite
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    edited 27 November 2022 at 1:26PM
    Desk said:
    eskbanker said:
    Desk said:
    My investing is entirely in cash
    Why?

    If you have earnings likely to stray into 46% territory and are looking at locking away huge sums of money for more than five years, then it would probably make more sense to consider actual investing rather than saving.

    Also, are you making the best use of tax wrappers such as ISAs?
    My earnings won’t take me anywhere near 46% by itself - the maturing interest in the multi-year savings bonds will.

    I’m maxed out re ISA, and don’t have an appetite for stocks and shares in the current climate.
    You can't actually pay 46% tax on interest as the Scottish government has no say on the tax rates for interest (or dividends).

    But it sounds like you will be in the range where your Personal Allowance is tapered so 40/45% tax will only be part of the bill.

    If you're under 75 you can probably mitigate this slightly by adding £2,880 (£3,600 gross) do a RAS pension scheme.  Which can be kept in cash if that's your preference.

    Or are you already contributing the maximum allowed?
  • EthicsGradientEthicsGradient Forumite
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    Desk said:
    Hi folks,
    My investing is entirely in cash, and I've secured a range of multi-year fixed term bank and building society savings bonds averaging around 5%.
    The majority are accounts which allow me to choose between paying out and compounding on an annual basis, and the sum invested allows me to compound across all these years without breaching FSCS.
    I've got one at three years and another at four years, but I've got others at a full five years. However, I'm aware that HMRC is generally notified of interest on savings at the point when they become accessible - the majority of this set to be in year five, and with the prospect of this sum lifting me fairly significantly from being in the 41% tax band to 46%.
    As I prepare to invest monies, what I'm wondering is whether to try and spread more money into two or three year savings bonds in order to try and avoid going too high into the 46% tax bad in year five. However, if interest rates have dropped back significantly, I would be missing out on the extra interest year five would generate, particularly if compounded.
    I'm wondering if the best bet is to stick with the plan to lean towards five years, but to play this on a year-by-year basis. If interest rates remain fairly high, opt to pay out and then reinvest that sum - possibly on a rolling five year plan. If interest rates have fallen by the end of the next financial year, opt to compound the money and take the hit?
    In order to mitigate against tax, I can opt to defer a large lump of my salary in 2026/27 into my workplace pension, which would lower the amount rising into the 46% tax bracket, but I won't see the benefit of that money for many years to come.
    I appreciate that I'm in a very fortunate position here, but any thoughts on managing this would be much appreciated.

    Check with all your current providers exactly what interest they're going to report and when to HMRC, to find out what the true situation of when tax will be payable is. Don't try and infer it yourself from Terms and Conditions - almost no one, including HMRC, is being clear on the subject, and we deserve clarity. This will allow you to know for sure what your position is.

    Then, as you say, use bonds that pay out annually in future, if that avoids putting too much tax in any one year. Reinvest the interest (with any other extra cash you have) in what seems to fit your future needs at the time.
  • edited 27 November 2022 at 2:49PM
    wmb194wmb194 Forumite
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    edited 27 November 2022 at 2:49PM
    "The majority are accounts which allow me to choose between paying out and compounding on an annual basis, and the sum invested allows me to compound across all these years without breaching FSCS.
    I've got one at three years and another at four years, but I've got others at a full five years. However, I'm aware that HMRC is generally notified of interest on savings at the point when they become accessible - the majority of this set to be in year five"

    If you were given the *option* to have interest paid away annually or monthly when you opened the accounts then you should expect to report the interest annually as the fact is that the interest was made available, you just chose not to take it.
  • AlbermarleAlbermarle Forumite
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    However, I'm aware that HMRC is generally notified of interest on savings at the point when they become accessible

    There have been a number of threads mentioning this subject, with conflicting experiences from posters.

    It seems that HMRC treat the interest in the tax year it is reported to them, which makes sense.

    However it is not clear when some providers are reporting interest on longer fixed term savings accounts. Some seem to report yearly, even though the money is not accessible to the client, but some do not. It appears to be a grey area, and the only way to be 100% sure is to ask the provider. However many have long wait times for calls and response to e mails can be erratic. Plus the person you do contact may not even know the answer anyway.

    As WMB914 says it can matter if you ask for the interest to be paid annually or not, if that is an option.

    and don’t have an appetite for stocks and shares in the current climate.

    Not sure what is different about the current climate, than any other time ?Stocks and shares go up and down on a regular basis and in fact have improved in recent months. The inflation situation is more unusual, but that hits cash savings as well. 

  • OcelotOcelot Forumite
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    wmb194 said:
    "The majority are accounts which allow me to choose between paying out and compounding on an annual basis, and the sum invested allows me to compound across all these years without breaching FSCS.
    I've got one at three years and another at four years, but I've got others at a full five years. However, I'm aware that HMRC is generally notified of interest on savings at the point when they become accessible - the majority of this set to be in year five"

    If you were given the *option* to have interest paid away annually or monthly when you opened the accounts then you should expect to report the interest annually as the fact is that the interest was made available, you just chose not to take it.

    Exactly.
  • jimjamesjimjames Forumite
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    Desk said:
    eskbanker said:
    Desk said:
    My investing is entirely in cash
    Why?

    If you have earnings likely to stray into 46% territory and are looking at locking away huge sums of money for more than five years, then it would probably make more sense to consider actual investing rather than saving.

    Also, are you making the best use of tax wrappers such as ISAs?

    I’m maxed out re ISA, and don’t have an appetite for stocks and shares in the current climate.
    But what about before the current climate? It sounds like you've been building up savings for some time so would have seen different market cycles. You might not be prepared to see investments decrease but essentially if you are locking away for 5 years then you could do the same for investments rather than looking on a regular basis and worrying.
    Remember the saying: if it looks too good to be true it almost certainly is.
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