In May 2019,NS&I introduced some changes to the Terms & Conditions on it off-sale Guaranteed Growth Bonds (so those that are only available to existing customers), the first of which will be maturing now. And these changes could see some savers paying more tax on their savings interest, than they will be expecting.
Although the Guaranteed Growth Bonds have not been available to new customers for some time, those who already hold previous issues of the bonds can still roll them over at maturity.
NS&I made a big splash in explaining that one of the key changes to the bonds was that any new bonds rolled over after 1 May 2019 would no longer offer savers access to the bond before maturity. Instead, a 30-day cooling off period was introduced so that savers could change their minds if they realised they might need the cash and therefore didn’t want to tie the money up for the term. Prior to this change, customers were able to close their bonds early, although they would be penalised with a charge equivalent to 90 days interest if they did this.
However, what was not highlighted was another equally important change affecting the way the interest earned on these bonds is treated for tax purposes. This means that those who rolled over NS&I Guaranteed Growth Bonds after the provider changed the Terms & Conditions in May 2019, could find they have to pay tax on the interest earned on their bonds, when they wouldn’t have previously needed to – or they may need to pay more tax than they were expecting to.
What change occurred?
Rather than spreading the interest payments over the term of the bond, as happened previously, it is now deemed to be received only at maturity.
Although NS&I Guaranteed Growth Bond customers do benefit from compounded interest each year, the provider has stated that “We will add your interest without deducting any tax. However, the interest is taxable so it will count towards your Personal Savings Allowance in the year that your bond matures”
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 well push the interest earned in that year over your annual Personal Savings Allowance (PSA).
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.
For many customers, this change to the way NS&I Guaranteed Growth Bond interest is paid, may not have too much of an impact. Especially if you were to roll over into one of the current issues, as they are paying such poor rates so the amount of interest you can earn is unlikely to push you over the PSA. However, around the time of the changes to the Terms & Conditions, the issues on sale were much more generous than they are today.
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.
This change 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.
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 rolled £50,000 into the NS&I Guaranteed Growth Bond 3-year term, Issue 59 in May 2019, which was paying 1.95% AER, if the interest was deemed to have been paid annually, you would have received gross interest of £975 in year 1, £994.01 in year 2 and £1,013.40 in the final year – just breaching the Personal Savings Allowance in that last year. In this example you would pay 20% tax on £13.40 in that final year (so £2.68) – both other years and subsequent interest amounts earned, are under the PSA – so there would be no tax liability.
However, now as the interest is counted only in the year of maturity, a total amount of £2,982.41 will be received in one fell swoop. Therefore, tax of 20% is due on the £1,982.41 that exceeds the PSA, which is £396.48 of tax to pay on your savings– a pretty significant unexpected liability. From £2.68 tax to £396.48!
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.ukAnd how were customers informed of these changes?
According to information gathered from NS&I by financial website This is Money it states "Although the bond terms and conditions changed on 1 May [2019], the tax changes were detailed in account information provided to customers from 2 September that year, four months later."
NS&I also admitted to This is Money that “while NS&I Guaranteed Growth Bonds customers receive an annual statement each April telling them about the interest they earned on their accounts, the information about the different tax treatment was only included in the April 2021 version, not the year prior as they had only begun earning interest from May 2020.”
So, it would appear that the communication about this important change was not well distributed.
What about other fixed term bonds
The reason that this change is so disappointing and important to be fully explained, is that it is very unusual – and therefore it’s not something that you might expect to check for.
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 was available back in May 2019 was with Aldermore and was paying 2.40% AER - so a much better interest rate when compared to NS&I Guaranteed Growth Bonds at that time, and even if you choose from the outset to roll your interest over, as it is deemed to have been received each year, the liability is spread.
Assuming the same deposit amount of £50,000 as in the NS&I example above, the much higher interest rate means that a basic rate taxpayer would still be liable for some tax, but it would be far lower as it is shared over the term of the bond.
In year 1, the interest earned is £1,200 so the saver would pay 20% on the excess £200 which equates £40, in year 2 it’s a little bit more - £1,228.80 - (due to the compounding effect of rolling the interest over), so the tax due is £45.76 and in year 3 it’s £1,258.29 with a tax liability of £51.66 - total tax due would be £137.42, which is £259 less than the NS&I Guaranteed Growth Bond– even though the interest rate and therefore the gross interest earned is higher.
So, with most fixed rate bonds, even though you might not actually have access to the interest and 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.
How is any tax due on interest paid?
If you receive interest in excess of the applicable PSA limit, then the onus is on you to make sure that you pay the right amount of tax that is owed.
The tax will be collected automatically through the PAYE system or through a self-assessment, if you already complete one.
But with the PAYE system, your tax code will be amended to allow for the assumed amount of interest you could be earning, rather than the actual amount. So if your circumstances change, your tax code could be wrong and you could end up paying more tax than you should be. As a result, it’s important to keep an eye on your tax code and contact HMRC if they have inaccurate information about the level of tax you expect to earn on your savings.
If you have rolled over into a Guaranteed Growth Bond since May 2019, and you believe that you were not supplied with the necessary information and as a result will suffer an unexpected tax liability, try contacting NS&I’s complaints team in the first instance. And if you are not satisfied that your complaint has been dealt with appropriately, you can take it to the Financial Ombudsman.
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