Pay Taxes Early: Collect Preferential Interest or Save Instead?

Have you ever thought about paying your taxes early voluntarily? Swiss tax authorities reward early payments with preferential interest – a nearly forgotten tax-saving tool! While most taxpayers wait until the last minute, you can earn additional returns through clever timing. But be careful: times have changed. In the past, preferential interest was the clear winner; today, rising bank savings rates are competing with this tax trick. Which strategy is currently more worthwhile for your money?

Early Tax Payment: The Principle of Preferential Interest

If you pay your taxes before the official due date, the cantonal tax authorities reward you with preferential interest. This mechanism is designed to motivate citizens to settle their tax debts early and improve public liquidity.

How Does Preferential Interest Work?

The preferential interest rate is set individually by each canton and may change regularly. The rate is usually:

• Calculated pro rata temporis: proportionally for the number of days paid early
• Applied to the entire tax amount: both cantonal and municipal taxes
• Automatically credited: reflected in the final tax assessment

Cantonal Interest Rates: A Big Comparison

The interest rate for early tax payments varies significantly between cantons. For larger tax amounts, these differences can lead to noticeable changes in return.

Current Interest Trends

While preferential interest rates dropped sharply in recent years due to the Swiss National Bank’s negative interest policy, they are now showing slight recovery. Typical rates currently range from:

• Low cantons: 0.25% to 0.75% per year
• Moderate cantons: 1.0% to 1.5% per year
• Higher cantons: 1.75% to 2.5% per year

Preferential Interest vs. Savings Account: The Key Comparison

In the past, preferential interest was almost always more attractive than bank savings interest, but that has changed. As some banks raise savings rates again, a careful comparison is now necessary.

Advantages of Early Tax Payment

• Guaranteed return: fixed rate without market risk
• No fees: free “investment” with the tax office
• Planning security: tax debt already settled
• Liquidity bonus: easier household budgeting

Disadvantages in the Current Environment

• Low rates: often below current savings offers
• Loss of liquidity: money is no longer freely available
• Inflation risk: real negative returns at low rates
• Opportunity cost: other investments may be more profitable

Current Interest Landscape: Bank Rates Catching Up

As some banks now offer higher savings rates, the interest on a savings account can sometimes exceed the preferential interest rate. This development requires an individual cost-benefit analysis.

Competing Investment Options

• High-interest savings accounts: partly over 1.5% per year
• Fixed-term deposits: up to 2.0% for longer durations
• Money market accounts: flexible rates with upward trend

Dynamic Interest Trends

Interest rates are currently very dynamic. What looks advantageous today may change within months. Staying informed is essential.

Strategic Considerations for Early Tax Payment

Your decision should not be based solely on interest optimization but also consider other factors.

Liquidity Planning

• Cash flow needs: will you need the money in the meantime?
• Emergency fund: does early payment reduce your reserves?
• Planned expenses: are major purchases coming up?

Tax Aspects

• Deductibility: preferential interest counts as taxable income
• Timing effects: with variable income, payment timing matters
• Progression effects: for high incomes, shifting tax liability may be beneficial

Example Calculation: Preferential Interest vs. Savings Account

Practical comparison for a CHF 10,000 tax bill paid 6 months early:

Preferential interest scenario (1.5% p.a.):

• Interest credit: 10,000 × 1.5% × 0.5 = CHF 75
• Minus tax on interest (30%): – CHF 22.50
• Net return: CHF 52.50

Savings account scenario (2.0% p.a.):

• Interest credit: 10,000 × 2.0% × 0.5 = CHF 100
• Minus tax on interest (30%): – CHF 30
• Net return: CHF 70

Result: The savings account yields CHF 17.50 more in this example.

Best Timing for Early Tax Payment

If you choose early payment, timing is crucial.

Best Times

• Beginning of the year: maximum interest accrual
• After bonus payments: optimal use of extra liquidity
• During rising interest: lock in better rates

Unfavorable Times

• Just before due date: minimal interest effect
• During rising market rates: high opportunity costs
• Before major expenses: risk of liquidity shortage

Alternative Strategies for Yield Optimization

If preferential interest is not attractive, other tax optimization strategies may be better.

Tax Planning Instead of Preferential Interest

• Maximize deductions: often bigger savings than interest income
• Use payment deferrals: if loan rates are low
• Consider installment payments: maintain liquidity with minimal costs

Portfolio Integration

• Holistic view: treat preferential interest as part of your investment strategy
• Risk diversification: secure return vs. volatile markets
• Tax optimization: offset interest income with other earnings

Conclusion: An Individual Decision Based on Current Conditions

Early tax payment was long a strong tax-saving instrument but has lost attractiveness in today’s interest environment. While preferential interest offers safe but often low returns, current savings products may match or outperform it. Your decision should weigh not only interest optimization but also liquidity needs, tax implications, and personal financial planning. Review current conditions regularly and adjust your strategy to changing market dynamics.