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In the process of financial planning, I'm planning to build a reserve for tax-holding purposes -basically dumping 25% of every incoming penny into this bucket.

Historical evidence suggest, that this bucket needs not to be in my sight during day-to-day banking (poor decisions made in the past because they were.)

Hence, my question is: what financial product would you recommend for short-term (<12 month, by definition :) ) money-holding for this reserve, that might yield some interest during this time, but more importantly: is out of my sight, and can be liquidized in a week's notice?

Alternatively: what do you use for parking your taxes throughout the year?

Edit: Working in the UK, we're paying tax once a year, meaning eg. the first month payment could have 11 months of interest accrued.

  • What country are you talking about? In the US - I would suggest having more taxes withheld during the year to make sure you don't have to pay taxes at the Tax Day, because if you owe too much you might get fines (see here for details). – littleadv May 22 '11 at 19:33
  • What country are you taking about? For example, in the US taxes are supposed to be paid throughout the year. The employed will have it withheld from their paychecks and the self-employed are supposed to make estimated payments quarterly. Otherwise, they will likely incur under payment penalties. – George Marian May 22 '11 at 23:11
  • Very roughly, how much money would it be? – Ganesh Sittampalam May 24 '11 at 16:43
  • around $1-2K-ish, depending on current contracts. – Silver Dragon May 26 '11 at 14:22
  • That's per month? – Ganesh Sittampalam May 26 '11 at 15:50
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One option might be to use tax certificates to save this money. At the moment they don't pay any interest (unless you deposit more than £100,000 at once), so they aren't very attractive from that point of view.

But they do give you a clean way to segregate your money and for the purposes of charging penalty interest, HMRC will treat you as having made the payment at the time you purchased the certificate, if it turns out that you should have paid the actual tax earlier than you did.

Another option is a regular saver account. These typically have limits of £250 per month, so you might have to open a few given the amount you have to save. That would add up to a lot of maintenance effort, particularly as you'd have to open new accounts again each year. However, they do typically offer good interest rates compared to what's available elsewhere, and the way they operate fits well with your needs (money coming in regularly and then going out all at once).

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