Tax quirk could boost pensioner bond interest by £112

Celebrating pensioners

It’s a case of the second mouse getting the cheese, rather than the early bird catching the worm, for 105,000 people with pensioner bonds who’ll see their savings interest boosted by the incoming savings allowance.

People who bought a one-year pensioner bond after 5 April 2015 – around 23% of those holding these accounts – will not be charged tax on their interest under the new rules, boosting returns by £112 (66%) for a higher rate taxpayer with the maximum £10,000 balance. A lower rate taxpayer will get 25% more cash, giving them an extra £56.

People holding the three-year pensioner bonds, which pay 4% interest a year, will also get a bonus if they bought at the right time. Someone who put £10,000 in one of these accounts will get £400 this year if they invested after 5 April 2015, but lower rate taxpayers will get £320 and higher rate taxpayers will get £240 if they bought their bonds earlier.

And NS&I tells Moneywise that the boost over three years could be even higher, as this extra interest can be reinvested, making next year's interest payment higher still. 

How does the new savings allowance work?

From 5 April, most people will receive a new savings allowance, giving them tax-free savings income, on top of their income tax allowance. Higher rate taxpayers will be able to earn £500 a year before they start paying tax on their savings interest, and lower rate taxpayers will be able to earn £1,000.

People earning enough to be on the 45% additional rate will not benefit from this change.

After this date, interest on savings accounts will be paid tax-free, as opposed to being taxed as income under the current system. People who earn more than the savings allowance will need to complete a tax return to calculate the amount of tax they need to pay.

The savings allowance is on top of your income tax allowance, so if you’re not earning you’ll be able to earn a lot more before you need to start paying tax, as shown by these examples from the Treasury (click to enlarge):

Taxes on individual savings accounts (Isas) aren’t changing, so any money you invest in them will stay tax free. See our top Isa savings accounts here.

Act now if your pensioner bond is maturing

If you hold a pensioner bond that’s maturing this year, you won’t be able to find another account that matches the interest rate you’re currently receiving. Your money will get transferred to an account paying 1.45% interest if you do nothing, but you could get a better rate by switching to a better account elsewhere. See our guide to the best savings rates here.