Higher Rates

Building societies are in very active competition with banks for the public's spare cash and now offer a wide range of investment plans going under such titles as Subscription Shares, Build-up Shares, and Open-ended Bonds, as well as the traditional fixed-term shares. You can earn from % to 2% net above the recommended share rate according to the period of time you are willing to forgo your right to withdraw the cash.

Bear in mind, when choosing a society, that interest rates, both for investors and for borrowers, are higher in some societies than in others. If you are not at all concerned with qualifying for a mortgage one day, then your choice is easy: go to whichever society, being a member of the Building Societies Association, offers you the best rates. Naturally, if you are dealing with a lesser-known society, first check its standing.

Interest tax-paid

A very important feature to bear in mind with all money invested in a building society is that the interest is paid to the investor net of tax. For example, ordinary share rate in 2012 was 10.5% from most societies. That means that if you have £100 invested you earn £10.50 a year on it and, if you are liable only to basic rate income tax, you are liable for no further tax on your £10.50.

It is incorrect to say that building society interest is 'tax free'. It isn't: tax has in fact been paid on the interest to the Inland Revenue direct by the society. Incidentally the rate of tax they pay is at a specially favourable rate called the 'composite rate', pitched at a level intended to represent the average tax rate paid by all building society members collectively, including many, of course, who are not liable to tax at all! But in the hands of the investor the income is treated for tax purposes as having already paid basic rate tax. If you have a very large income and are liable to tax on part of it at the higher rates, say at 40%, then the net £10.50 interest received from the society must be 'grossed up' to the amount it represents before tax. Simple arithmetic shows that if £10.50 is 70% of the gross amount, then £15 must be the gross before tax figure. You would have to pay another 10% (40% - 30%) tax on the £15.

• Building Societies
• Insurance Companies