Following the announcement at the Spring Budget in March 2024, NS&I has finally announced the details of the new so-called British Savings Bond. And, as expected I’m afraid there’s no need to get out the bunting!
In essence, the new British Savings Bond is simply a re-issuance of the NS&I 3-year Guaranteed Income and Guaranteed Growth bonds, rather than anything new or British! And the rate they are offering is 4.15% gross/AER for the Guaranteed Growth Bond and 4.07% gross/4.15% AER for the Guaranteed Income Bond.
As was reported just after the budget and as is often the case with NS&I products, whilst the interest rate is not rock bottom, it’s mid table, so is likely to still be popular, especially for those rolling over old bonds, and for those with more than the FSCS limit of £85,000, because of course all cash held with NS&I is guaranteed by HM Treasury.
At the time of writing, the top 3-year bonds are paying around 4.70% AER. On a deposit of £50,000, you could earn over £1,000 more after three years if you choose a top paying bond.
One thing to be aware of is that if you choose the Guaranteed Growth version of the British Bond, as there is no option to take an income at all, 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 added and 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.
The reason this could be significant is because if all the interest is deemed to have been received in one year rather than spread over the term of the bond, it could mean a larger tax bill, as you can’t spread the interest over the term of the bond and therefore utilise the Personal Savings Allowance (PSA) each year.
The PSA was introduced in April 2016 and it means that basic rate taxpayers can earn up to £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.
For many customers, this may not have too much of an impact, especially if you are already using your PSA. But it’s important to be aware.
And let’s not forget that for some, it could mean that they are pushed into a higher (or even worse, the highest) tax bracket for that year.
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 you deposited £50,000 into the NS&I Guaranteed Growth Bond 3-year term (British Savings Bond), paying 4.15% AER, if the interest is deemed to be paid annually, you would receive gross interest of £2,075 in year one, £2,161.11 in year two (due to the compounding effect of rolling the interest over) and £2,250.80 in the final year, breaching the PSA each year. But if this were spread over the term, in this example you would pay 20% tax on £1,075 in year one, on £1,161.11 in year two and on £1,250.80 in year three – so £697.38 in total.
However, as the interest is counted only in the year of maturity, a total amount of £6,486.91 will be received in one fell swoop. Therefore, tax of 20% is due on the £5,486.91 that exceeds the PSA, so there would be £1,097.38 of tax to pay on your savings– a pretty significant unexpected increase, from £697.38 tax to £1,097.38!
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.
The majority of fixed rate bonds from banks and building societies do not make their interest payments in this way. If the bond offers the option to either take the interest annually or roll it over, it is likely that the interest is deemed to be received annually, even if it is rolled over. The top paying 3-year bond that gives savers the option to take an annual (or monthly income) or roll it over is the new 3 Year Fixed Term Savings Account with RCI, paying 4.70% AER.*
Again, assuming the same deposit amount of £50,000 as in the NS&I example above, although the top rate is paying a higher interest rate, a basic rate taxpayer would likely pay less tax, as it is shared over the term of the bond.
On a bond paying 4.70% AER, in year one the interest earned would be £2,350 so the saver would pay 20% on the excess £1,350 which equates to £270, in year two it’s a little bit more interest - £2,460.45 - so the tax due is £292.09 and in year three it’s £2,576.09 interest, with a tax liability of £315.22 - total tax due would be £877.31, which is £220.07 less than the NS&I Guaranteed Growth Bond– even though the interest rate and therefore the gross interest earned is higher. After tax you’d earn £6,509.23 on the RCI bond, versus £5,389.53 on the NS&I bond – more than £1,000 extra.
Please note that these calculations are for illustrative purposes only. We are not tax advisers at Savings Champion, so you should check your personal tax situation with a tax specialist.
NS&I is a trusted institution so will always be popular, but savers can earn quite a lot more if they shop around and perhaps choose a provider they are less familiar with.
*We are occasionally paid by some providers if you click through from our Best Buy Tables and open a savings or current account with them. We will never accept a payment that compromises in any way our independent, whole of market approach to providing information on savings products. For clarity we will indicate those companies who remunerate us with an asterisk (*).
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