🔔 NS&I offers escape from tax trap

NS&I has offered 14,400 customers a penalty free exit from an interest tax trap. But is it a case of out of the frying pan and into the fire?

A couple of months ago we reported on the potential unexpected tax bill that some savers may be hit with when rolling over their NS&I Guaranteed Growth Bonds. Terms and Condition changes were introduced in May 2019 which means that there is now NO access allowed at all to these bonds before maturity, after an initial 30 day cooling off period. Prior to the changes, savers could access their money early, albeit with a penalty equivalent to 90 days’ notice.

Whilst NS&I did make this change to the access clear to customers, it failed to immediately inform them of changes to the way the interest earned is reported to HMRC – arguably just as important, as it could see savers paying more tax on their interest than they would have under the old rules.

Under the new Terms, the fact that there would be no access until maturity means that all the interest is reported in the year of maturity instead of being spread out.

With most fixed term bonds, as they offer the option to take the money annually (and sometimes monthly), the interest is reported to HMRC each year, thereby spreading it out, even if the customer chooses to roll all the interest over until maturity.

The reason this is important is because before the changes occurred, even though the interest was still only received at maturity, it was deemed to have been received each year. Therefore customers were able to utilise the Personal Savings Allowance (PSA) each year, if applicable.

The PSA is an allowance that means basic rate taxpayers do not have to pay tax on the first £1,000 of interest they earn on their cash savings each year. The allowance is £500 per year for higher rate taxpayers and additional rate tax payers do not receive a PSA. For more information about this valuable allowance, download our factsheet.

NS&I finally referenced the changes to customers in September 2019, although it wasn’t well documented, and many will not have realised that it was important, leaving some savers out of pocket.

According to an article in The Sunday Times, NS&I has admitted it had failed to inform customers of this important change that occurred in May 2019, until September that year and some 14,400 customers reportedly opened accounts during that four-month period.

Although the current issues of the Guaranteed Growth Bonds are paying just 0.15% AER for 2-years, 0.40% AER for 3-years and 0.55% AER for 5-years, in May 2019 they were far more appealing, paying 1.70% for 2-years, 1.95% for 3-years and 2.25% for 5 years.

Those who rolled over just £11,372 for 5-years, £16,765 for 3-years or £29,164 for 2-years will breach the £1,000 PSA in the year of maturity, whereas under the old rules they wouldn’t have, assuming they earned no other interest from other savings accounts.

According to the The Sunday Times, NS&I said that it “could have been clearer in explaining the tax treatment for customers who invested in Guaranteed Growth Bonds” and as a result, on 15th June this year, wrote to 14,400 customers who rolled over into a new bond between May and September 2019, giving them 30 days to cash in their bonds without penalty if they felt that it was no longer appropriate.

However, as interest rates on alternative bonds have fallen since 2019, cashing in is unlikely to have been the best option as, although the interest would be spread out over the term of a new bond with a different provider, the new interest earned is likely to be less than that earned on those early Guaranteed Growth Bonds, despite any potential tax bill.

So it’s a pretty hollow offer and one that if taken up would probably see savers earning even less.

It’s not the first time NS&I has been in hot water. Following big cuts to it savings rates last year resulting in an exodus of savers, many struggled to get through to the provider and access their cash. As reported by the BBC,  in the six months to the end of September last year, NS&I saw a 43% increase in complaints compared to the previous six months. Not a good sign for the once popular and trusted savings provider.