Hot on the heels of recent rate hikes to various NS&I (National Savings & Investments) savings products, including the highest rate applied to Premium Bonds since March 1999, the Treasury backed bank has launched the latest issue of its Green Savings Bond. Issue 5 is paying 5.70% AER fixed for three years on balances of between £100 and £100,000 and is available to open online. This is a big increase from the last issue, which was paying 4.2% AER, but the rest of the market has also increased strongly since Feb 23, when the last issue was launched.
As a result, whilst competitive there are plenty of better 3-year bonds to choose from – the best rate is currently 6% with BLME, and you can even earn 6.20%, again with NS&I, for a 12 month term.
However, by launching a much more competitive rate, this makes it clear that NS&I is hoping to increase the amount of cash in the Green Savings Bond, the proceeds of which are to be used to fund the Government’s green projects. NS&I says money saved in the bonds funds projects such as making transport greener, using renewable energy over fossil fuels, preventing pollution, using energy more efficiently, protecting natural resources and adapting to a changing climate.
Since the first issue went on sale in October 2021, £915 million has now been invested, which has been a huge improvement as the latest issues have been much more competitive than the initial version, which paid just 0.65%. Even though interest rates as a whole were much lower in October 2021, the best rate on offer at that time was still almost three times higher than Issue 1 of the NS&I Green Savings Bond, at 1.82%.
One important thing to be aware of with this bond is that there is no option to take an income at all, so all of the interest earned will count towards your taxable income in the year the bond matures, rather than being spread out over the term of the bond, even though interest is compounded each year. With many other bonds, if you at least have the option to choose to have the interest paid out or compounded, the interest is deemed to be paid annually and therefore should be added to your taxable income each year. So, savers need to be aware that with this Issue of the Green Savings Bond, they could breach the £1,000 Personal Savings Allowance (PSA) with as little as £5,700.
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.
However, you cannot roll over any unused PSA, so if you don’t earn £1,000 in savings interest in one year, but you earn more than the allowance in the following year, that’s tough luck. You’ll still owe tax on any interest over the allowance for that individual tax year.
And with all the interest being deemed to have been received in the year of maturity, it’s more likely that many will pay far more tax on their savings than they should in that final year and some could even be pushed into a higher (or even worse, the highest) tax bracket for that year. If you were to deposit £100,000 you will receive interest of £18,093.22 on maturity, which will be added to your taxable income at that point.
This also could cause someone with taxable income of between £100,000 and £125,140 to suffer a whopping 60% tax rate (yes! 60%). Read an article written by our colleagues at The Private Office for more information about your allowances.
Unfortunately, those early adopters of the Green Savings Bonds will not see an increase to their interest – they will continue to earn between 0.65% for Issue 1, 1.30% for Issue 2, 3% for Issue 3, and 4.20% for Issue 4, until the end of the term.
And although you can earn more interest and potentially pay less tax elsewhere, for the environment’s sake, we still hope it is successful.
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