When to cash in: what the falling tax band is worth
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This page does not tell you to wait. Someone who needs the money needs the money, and no rate of return changes that. What it does is put the number on the table, including when waiting turns out to be worth very little.
It also answers the question in the other direction. If you are about to cash in and the page shows a large figure, you are days away from keeping it instead of handing it over.
Results
| Tax rate that applies today, in percent | — |
| What you keep if you cash in today | — |
| Day on which the tax drops | — |
| Days left until then | — |
| What you keep if you wait for it | — |
| Difference between waiting and not | — |
| Of that, the part that is the drop in tax | — |
| Of that, the part that is simply more yield | — |
| What the wait is worth as a yearly rate, in percent | — |
The two parts of the gain are shown separately because they behave differently. Extra yield is earned day by day and is roughly what you would expect. The drop in tax is a step: it applies at once to everything the money has earned since the first day, and it either happens or it does not.
That is why the last row can be so large. On a sum held for a year, crossing from the second band into the third takes two and a half points off the tax on a whole year of yield, and if that crossing is one day away, one day of waiting is what buys it. In the example the page opens with, the step is worth about ten times the interest of the extra day itself.
Read it the other way and it is a warning. Cashing in the day before a band changes does not cost you a day of interest; it costs you the difference in tax on everything you have earned. That is the expensive version of the same arithmetic, and it is the one people run into by accident.
What you would keep in each band
| Days invested | Tax rate | What you would keep |
|---|
Each line is worked out on the last day of its band, which is the point at which that rate has had the longest to apply. The arrow marks the band your money is in today.
If you are far from the next crossing, the figure above will be unremarkable and that is the honest answer. Waiting a hundred and sixty days for a band change is worth roughly what the investment pays anyway, because the step gets diluted across all that time. The large numbers belong to people who are a few days away, not to everyone.
How much can one day of waiting be worth?
More than a year of ordinary yield, if that day is a band crossing. On 10,000 at 10.5% a year, moving from day 360 to day 361 takes the tax from 20% to 17.5% and puts about 28 more in your pocket. Over a single day that is the same as an investment paying around 160% a year.
The reason is that the lower rate applies at once to everything the money has earned since the first day, not to the yield of that one day. In the same example the tax step is worth about ten times the interest of the extra day itself.
| Days invested | Tax rate |
|---|---|
| 1 to 180 | 22.5% |
| 181 to 360 | 20% |
| 361 to 720 | 17.5% |
| 721 or more | 15% |
Does this mean I should always wait?
No. Someone who needs the money needs the money, and no rate of return changes that. The page puts the figure on the table and leaves the decision where it belongs.
It is also honest when waiting is not worth much. If the next crossing is a hundred and sixty days away, the gain works out at roughly what the investment pays anyway, because the step gets diluted across all that time. The striking numbers belong to people who are a few days away.
What happens if I cash in the day before a band changes?
You do not lose a day of interest, you lose the difference in tax on everything you have earned. That is the same arithmetic read backwards, and it is the version people run into by accident.
This is worth checking before any redemption that has been sitting for close to six months, a year or two years, because those are exactly where the bands change.
Is this the same as comparing two investments?
No. Comparing a taxed product with a tax-free one is a different question, and a different page answers it. This one looks at money you already have invested and only asks when to take it out.
The regressive table shows up in both because it is the same law. There it helps you choose a product; here it helps you pick a date.
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