- Guaranteed Growth Bonds lock your money away for three years and pay 4.15%
- They are structured so they can only be accessed at end of the three-year term
Savers who put just £7,705 into NS&I’s new British Savings Bonds could be landed with a tax bill in three years’ time, due to the way the bonds are structured. Higher rate taxpayers will pay tax if they have just £3,852 in the new account.
The Guaranteed Growth Bonds, which went on sale last week, lock your money away for three years and pay a rate of 4.15 per cent a year.
Although interest is earned every year, NS&I has structured the bonds so that it can only be accessed at the end of the three-year term. As a result, they are taxed as if all of the interest is earned in a single year, which leads to a greater tax bill.
Savers have a personal savings allowance that allows basic rate taxpayers to earn up to £1,000 in interest each tax year without paying tax. Higher rate taxpayers can earn up to £500 and additional rate taxpayers have no allowance.
New offering: NS&I’s Guaranteed Growth Bonds, which went on sale last week, lock your money away for three years and pay a rate of 4.15% a year
Any interest earned above those allowances attracts income tax at savers’ marginal tax rate.
If a saver puts £10,000 into one of the bonds, they would receive £415 in interest in the first year, £432 in the second and £450 in the third year.
The interest earned increases every year because interest from previous years is added to the capital and benefits from compounding.
If the interest paid out every year, each interest payment would benefit from that year’s personal savings allowance.
But because interest is only paid at the end of the term, HMRC taxes all three years’ worth of interest – £1,297 – at once.
A basic-rate taxpayer would incur a £60 tax bill on the £297 that exceeded their allowance. If the interest was paid out annually, there would be no bill to pay.
NS&I says it structures the bonds in this way so that customers get the benefit of compound interest, which they would not if the interest was paid out every year.
Savers putting their money into NS&I’s new British Savings Bonds could take advantage of a simple trick to slash the tax bill on their interest.
Catch: NS&I has structured the bonds so that it can only be accessed at the end of the three-year term
Instead of the Guaranteed Growth Bond, savers could opt for the Guaranteed Income Bond, which pays a lower annual rate of 4.07 per cent, but pays interest monthly.
Several rival providers offer better deals. Oxbury and Hodge banks pay 4.66 per cent on their three-year fixed-rate bonds, while at Close Brothers, RCI Bank and Hampshire Trust the rate is 4.65 per cent.
These better rates mean you are missing out on up to £164 interest a year on each £10,000 by sticking with NS&I.
Money Mail is campaigning for the personal savings allowance to be doubled from £1,000 to £2,000 so that savers who have prudently saved nest eggs no longer face tax bills on their interest.
An estimated 2.7 million savers were hit with a tax bill on their interest for the first time in the last tax year – up by one million on the previous year.
