Best place to save money earmarked for tax

[TeddyK301]

Good afternoon all - hope everyone is keeping well in the UK

My question can be guessed quite easily from the subject heading.

I'm a freelancer and have just completed my first ever self-assessment tax return with HMRC for the 2019/20 tax year. I currently have a bank account with First Direct that gave me the option for a regular savings account when I first transferred to the bank. It allows me to put a maximum of £300 per month for one year at an interest rate of 5% AER. Next month will be my final month and all the money in there is earmarked for my tax bill due by 31 January 2021.

I'm currently looking at other bank accounts on Money Saving Expert website I can potentially open to continue to save a regular amount each month at a half-decent rate. There are a couple with 2.75% AER.

However, I will have a lump sum of £3,600 (plus interest) from the First Direct reg saver next month with no home. And I will be continue to save 20% of my income to cover my 2020/21 tax bill.

What solutions are open to me?

I currently invest regularly in a stocks & shares ISA with Vanguard. I have a strategy for that and am happy with it.

But would opening a new fund separately to stash my tax money be a good idea? Obviously I wouldn't want to invest in LS100 or anything all equities as I need to be sure I have enough money to pay the tax when it falls due. But I was wondering what advice people can offer about other options with Vanguard. Perhaps, LS20 or even LS 40?

Now, I know investment is always risky and can go down as well as up. But there must be a place I can reguarly drop money while saving for a tax bill to earn more interest than the awful rates available on the high street?

Thanks in advance.

Cheers

ED

[UKMustache]

It's a 6 month timescale and is money which you are guaranteed to need access to. 
The opportunity cost is so minimal (maybe £70 if you get lucky?) and the potential downsides are so high (IE unexpected negative yield on bonds swings your selected fund downward in December).

I would just open a Marcus account and take the 1%

[habanero]

I dont know much about the UK tax system, but its fairly obvious you need to stash it somewhere the probability of any loss of principal is zero as you are guaranteed to need the money within a short time frame.

Another way to look at is what would the negative yield be in terms of fees/fines etc if you fail to make the full tax payment on time? Those can be pretty steep.

[TeddyK301]

This is exactly what I'm worried about. However, it is worth pointing out I always have an emergency stash of rainy day money, so when my tax bill is due at the end of Jan I would be able to get the money in the event of a drop in any investment account.
The tax bill isn't massive (around £3k). However, you are both right, any big drop in December would cause problems for me.

Jusrt seems a shame to have £4k or so sat around not working for me at all, just waiting to pay the tax man.

The Marcus account with Goldman Sach is a good shout.

I'll chew over it.

Thanks for your replies.

[ExitViaTheCashRamp]

Lloyds regular saver is 2% - this is lower than many others -- but you can feed £400 into it a month. If you have a spouse, they can have one too. The Club Lloyds account itself is 1% on up to £4k.

 So whilst you can beat those if you shop around, they are good to hoover up a lot of money quickly into interest paying accounts and have high street access in an emergency.

[TeddyK301]

Thanks ExitViaTheCashRamp

I was looking at the Lloyds one today. It's a good options. HSBC is 2.75 with max of £250 a month. I can get another reg saver with First Direct when my current one ends next months, but rate drops from 5 to 2.75 with £300 max a month.

Think these are the best options - just not worth putting in into LS20 or 40 in case of a sudden market drop.

Thanks for the help

[Playing with Fire UK]

Consider Premium Bonds. You are guaranteed to get what you put in, no messing with standing orders and multiple new bank accounts and you could get something worthwhile.

[TeddyK301]

Thanks Playing With Fire

I hadn't even thought about premium bonds. They seem so old fashioned and with little chance of winning anything. But with interest so low generally it might be a good bet.

Thanks

[Playing with Fire UK]

No problem! Yes, both of those things are true - but they are so very easy for larger amounts and the more you have, the more likely it is that you will get a reasonable string of little prizes.