NS&I has launched a new issue of its Green Savings Bonds, paying a competitive rate of 3% AER, fixed for three years.
To date, only a disappointing £288million has been raised by the previous issues of these bonds, probably because they were both far less competitive compared to the other rates available at that time. Issue 1 paid just 0.65%, matching the best easy access account available at the time, while the best three-year bond available was 178% higher at 1.81%.
The 2nd issue which was launched in February this year was more competitive, at 1.30% compared to the best 3-year bond available at the time which was paying 1.85%.
Today the best 3-year bond available is paying 3.45% - so this latest Green Bond could well be more popular as it is in reaching distance of the best rate available – whilst offering savers a way to make their money do some good for the environment.
Watch out for breaching the Personal Savings Allowance
As you can deposit up to £100,000 into the Green Savings Bond, if you were to put the maximum in, you will earn more than the Personal Savings Allowance (PSA) – and in fact, because of the way the bond is structured, although NS&I Green Savings Bonds customers do benefit from compounded interest each year, rather than spreading the interest over the term of the bond, all the interest earned will count towards your taxable income in the year the bond matures – increasing the amount of tax you may need to pay.
If all the interest is deemed to have been received in one year rather than spread over the term of the bond, it could well push the interest earned in that year over your annual Personal Savings Allowance (PSA), even if you deposit less than the maximum.
The PSA was introduced in April 2016 and it means that basic rate taxpayers can earn up £1,000 per tax year, before they have to pay tax on the interest on their cash savings accounts. The PSA for higher rate taxpayers is £500 and additional rate taxpayers don’t receive a PSA.
How much more tax could you be paying?
Let me give you an example which assumes the saver is a basic rate taxpayer and has no other savings accounts held elsewhere.
If they deposited £25,000 into issue 3 of the NS&I Green Savings Bond paying 3% AER, if the interest was deemed to have been paid annually, they would have received gross interest of £750 in year one, £772.50 in year two (due to the compounding effect of rolling the interest over) and £795.68 in the final year – all within the Personal Savings Allowance.
However, as the interest is counted only in the year of maturity, a total amount of £2,318.18 will be received in one fell swoop. Therefore, tax of 20% is due on the £1,318.18 that exceeds the PSA, which is £263.
Some savers will be eligible for the starting rate for savings, which means that you can earn an extra £5,000 in interest before it is liable for tax, however this only applies to those whose other income (so wages or pension income for example) does not exceed £17,570.
For more information on the starting rate for savings, take a look at the information supplied by Gov.uk
What about other fixed term bonds
The good news is that the majority of fixed rate bonds from banks and building societies do not make their interest payments in this way. For example, the very best 3-year fixed rate bond that is currently available is 3.45% with JN Bank UK.
Assuming the same deposit amount of £25,000 as in the NS&I example above, even though the rate is higher, there would be no tax to pay. In year one, the interest earned is £862.50, in year two it’s £892, and in year three it’s £923.04 – all within the PSA – so not only would you earn more interest in total (£2,677.80 as opposed to £2,318.18), there would also be no tax liability.
So, with most fixed rate bonds, even though you might not actually have access to the interest if you’ve opted to add it to the account, it is deemed to have been received each year and therefore is spread out over the term – making any tax liability far lower, or even non-existent.
But don’t forget the purpose of the Green Savings Bonds
Although you may earn less with the Green Savings Bonds, remember that the money raised will be passed onto HM Treasury which then plans to allocate an amount equivalent to the proceeds raised, to its chosen green projects, within two years.
So, for many this competitive rate and knowing that the funds raised will be used for good are the important factors – hopefully making this issue very popular.
@savingschampion
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