Thousands of NS&I savers have been offered the chance to cash in their fixed-rate bonds early, penalty-free
Thousands of NS&I savers have been offered the chance to cash in their fixed-rate bonds early, penalty-free.
Treasury-backed NS&I had to write to savers after failing to tell them changes to the terms and conditions of its Guaranteed Growth Bonds in 2019 could mean a big tax bill.
The bonds are no longer on general sale, but those who already hold them can roll them over into a new bond running for between one and five years.
Muddle: NS&I admits ‘it could have been clearer’ in explaining the bonds’ tax treatment
Before May 2019 savers could access their money early if they paid a fee equivalent to 90 days’ interest. Any tax owed on interest added to their accounts would be paid each year. But a rule change two years ago meant savers buying or renewing their bonds could no longer access their money early — altering when the interest is taxed.
On bonds bought from May 1, 2019, although interest is credited to an account annually, it is not taxable until the bond matures. This can mean some savers are in danger of breaching their annual personal savings allowance of £1,000 for basic-rate taxpayers and £500 for higher-rate payers.
Tax is due on any savings interest earned above these amounts. Additional-rate payers get no allowance.
A three-year bond taken out in May 2019 pays 1.95 per cent before tax — £597 for each £10,000 investment. With all the interest lumped in one tax year, higher-rate earners will bust their £500 personal savings allowance in the April 2022/April 2023 tax year.
Basic-rate taxpayers face a bill if interest earned on savings elsewhere outside an Isa is more than £403 in that tax year. And those who hold £20,000 in the bond will earn more than their £1,000 savings allowance.
On the five-year bond at 2.25 per cent, savers will see £1,177 interest on each £10,000 at the end of the term. Yet it took NS&I four months after the May 2019 rule change to tell savers how they would be taxed. Many only became aware of the changes in April this year when the tax risk was spelled out in their annual statements.
NS&I admits ‘it could have been clearer’ in explaining the bonds’ tax treatment.
It has since given 14,400 customers who renewed their Guaranteed Growth Bonds between May 2019 and September 2019 the chance to cash them in without penalty. But they had just 30 days to make up their mind after the NS&I letter was sent on June 15. Savers who failed to reply in that time missed the boat and could face a tax bill.
Taking cash is not always the right option, as lower rates elsewhere could mean basic-rate taxpayers are better off in the bonds.