NS&I bond changes could cause higher-rate taxpayers to breach personal savings allowance

17 April 2019

Changes to NS&I's three-year Guaranteed Growth Bond, paying 1.95% interest, could see higher-rate taxpayers breach the personal savings allowance. 

More than 500,000 savers with index-linked certificates will see their return drop when their investment matures after the end of April and they come to reinvest their money in more certificates.

Big changes are also in store for 677,000 savers looking to renew their guaranteed growth and guaranteed income bonds from the same date. 

Index-linked certificates are popular with savers because they protect their cash from inflation, and the interest is automatically tax-free. Savers hold £19.9 billion in them.

The certificates are no longer on general sale, but savers who already have them can reinvest their money in new issues when certificates come to the end of their term.

The certificates pay inflation plus 0.01% for two, three or five years. Until the end of April, the interest rate is linked to inflation as measured by the retail prices index, which is currently 2.5%.

But when savers come to renew their certificates from 1 May, the link switches to the consumer prices index (CPI) measure of inflation, which is lower, currently at 1.9%.

The CPI is traditionally lower than the retail version. Savers holding £10,000 worth of certificates will earn £191 in interest a year instead of £251.

The government-run savings provider is also tweaking its popular guaranteed growth bonds and guaranteed income bonds, in which 677,000 savers hold £17 billion. With the tweaks come changes to the point at which savers pay tax on interest.     

With the current bonds, savers can cash in early if they unexpectedly need to. But with the new versions, which go on sale on 1 May, they can no longer do this.

NS&I says the move puts it in line with the rest of the market, where eight out of 10 bonds work in this way, rather than giving savers early access to their money. The shift also affects when interest is taxed, and in turn how savers can use their personal savings allowance.

The point at which you are liable to pay tax on bond interest depends on whether you can access your money before maturity, says HMRC. If you can, you normally pay the tax each year when the interest is added to your account.

This lets you use your £1,000 personal savings allowance for each year against each annual interest payment. But with no access to your capital, tax is not due until the bond matures, and you could find you face a tax bill.

If, for example, you have £10,000 in a NS&I Three-Year Guaranteed Growth Bond at 1.95%, you earn £195 interest in the first year, £198 in year two and £203 in the final year – a total of £596. Currently, you can use your personal savings allowance against each annual payment.

This lets basic-rate taxpayers earn their first £1,000 interest a year tax-free. Higher-rate payers get £500. But in the new bonds, with no access to your money, the entire £596 will count against just one year’s allowance when your bond matures.

Higher-rate taxpayers will immediately face a tax bill, and basic-rate payers could if they have used up more than £404 of their £1,000 allowance for the year.

This article first appeared on our sister website Money Observer

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