Can some financially savvy person translate this for me please?

[roastytoastysnowballs]

Quote from Money Saving Expert:

If you are locking in, make sure you know the tax implications of how you take interest. Accounts paying interest 'at maturity' do so as a lump sum, which could take you over your personal savings allowance (PSA) for the year it matures – meaning you'd pay some tax on the interest. Alternatively, accounts that pay interest out to you monthly or annually might help keep you under your PSA as it's spread across tax years. Yet interest doesn't compound in this case.
So - basically I've got £150,000 to lock away (ideally for 3 years). I earn £30k per annum myself so I'm a normal tax payer.

On MSE I can access rates of 5.95% and interest annually or at maturity.

What would be the best option for me?

I'm really confused.

Thanks in advance.

Someone with more knowledge will be along I'm sure, but I think you would be entitled to up to £1000 a year in interest earnings without having to pay tax. Anything above that would be subject to 20 percent tax as you're a basic rate taxpayer. So it makes sense to have it paid out annually.

You could also use an ISA allowance for some of it, on which interest is tax free.

I think the scenario is that one can has a choice of two products both extending over, say, four years. They have broadly similar returns but one pays the lot as a single lump sum on maturity the other pays/credits interest monthly.

£3500 spread over four tax years keeps you below the £1k pa limit; no tax.

£3500 as a lump sum in year 4 incurs a tax liability.

If you took the interest annually, you'd receive about £9000 interest pa. However, if you took it on maturity, you'd get £27k in one lump.

However, you do have a personal savings allowance, which is dependent on your marginal tax rate. You could also mitigate the tax charge by using your ISA allowance, and possibly considering premium bonds.

I'm not 100% sure, but I'd expect that the larger amount would be taxed at your marginal rate, which obviously could be higher for the bigger lump of interest.

In simple terms, you'd be more likely to be taxed at 40% not 20% rate, but wouldn't make a difference if you already earn that much.

But I would ask if you need to keep all that money in cash and if you have a mortgage you could overpay, pension to pay into, or S&S ISA or general investment account, and it could be worth talking to an IFA, depending on your circumstances and plans for the money.

Ah, I now see that you have said how much you earn

In that case, you're probably better taking the annual interest, because if you took the 3 year option and received £27k in one go, you'd pay 40% tax on some of it, especially if you earn more than £30k in 3 years time. The rest of the waffle still stands though.

£20k into an Isa first of all. You don’t pay any tax on ISA interest. But you can only put £20k in per year (cash isa). You can put another £20k in in April.

Spread it into different places. Put 20k per annum into an ISA (can be a 3 year fixed cash ISA for the first year or a stocks and shares ISA if you're happy with risk) then put the balance into either 3 year bonds or premium bonds. You'll pay tax at 20% on the interest earnt outside of an ISA. If you receive interest annually you can offset some of the tax cost by using your annual allowance of £1k per year. If you have more than £1k of interest to declare you need to register with HMRC and file a self assessment tax return.

Do they pay the intrest in one go? I'd always assumed it was each year on the anniversary date regardless of the term fix.

I get interest monthly so have no idea.

Does anyone know the answer to this… If OP’s income was £0, say she’s stopped working, lives on savings and hasn’t yet started taking a company or private pension, is she allowed up to £12500 in interest on savings accounts?

https://www.gov.uk/apply-tax-free-interest-on-savings
Some worked examples there, but there are various things to consider as there's a £5k savings allowance for low earners.

MSE explains it better actually:

1. You earn less than £12,570. Here it's fairly simple. You benefit from both the £5,000 starting savings allowance – where you pay 0% tax, plus the personal savings allowance of £1,000. So, you can earn a total of £18,570 from income and savings interest without paying any tax.
2. You earn between £12,570 and £17,570. Here's where things start to change... For every £1 of non-savings income you earn above your personal allowance, you lose £1 of your starting savings allowance To find your combined tax-free allowance, subtract your annual income, excluding anything you earn from savings, from £18,570. This is the amount you can earn tax-free. For example... If you have non-savings income of £13,570 a year, you can earn a further £5,000 in interest and pay no tax (£4,000 from the starting savings rate and £1,000 from the personal savings allowance).
3. You earn £17,570 or more. You're taxed as normal on your income and you don't get any of the £5,000 starting savings allowance. But, you do still get the personal savings allowance relevant to your income tax bracket (£1,000 for basic-rate, £500 for higher-rate taxpayers).

Thank you for your replies..

So..

£20k in a 2 year fixed ISA saver at 5.85%

£130k in the 3 year fixed at 5.95%

And take the interest annually?

I hate Premium Bonds (that's where the money is atm and I'm sick of getting £100 per month)

You could out £20k of the £130k in a high interest instant access account and put into an isa on 6 April next year. The lower interest would be more than offset by tax saving over the next couple of years. Santander offers 5.08% instant access saver at the moment

Take the interest monthly, if you take it annually the first time you receive interest is in a years time, which is after April 6, in the next tax year, and therefore you are wasting your personal savings allowance this year.