Tax cheat on new British NS&I savings bonds when you pay just £7,700

Savers who invested just £7,705 in NS&I’s new UK savings bonds could be forced to pay tax in three years, due to the way the bonds are structured. Higher rate taxpayers will pay tax if they only have £3,852 in the new account.

Guaranteed Growth Bonds, which went on sale last week, lock your money for three years and pay a rate of 4.15 percent annually.

Although interest is earned every year, NS&I has structured the bonds so that they can only be accessed at the end of the three-year term. As a result, they are taxed as if all interest was earned in a single year, resulting in a larger tax bill.

Savers have a personal savings allowance which allows basic rate taxpayers to earn up to £1,000 in interest each tax year tax-free. Higher rate taxpayers can earn up to £500 and additional rate taxpayers have no relief.

Any interest earned above those allowances triggers income taxes at savers’ marginal tax rate.

If a saver invested £10,000 in one of the bonds, they would receive £415 in interest in the first year, £432 in the second and £450 in the third year.

The interest earned increases each year because interest from previous years is added to the principal and benefits from compounding.

If interest were paid every year, each interest payment would benefit from that year’s personal savings allowance.

But as interest is only paid at the end of the term, HMRC taxes the three years’ interest (£1,297) in one go.

A basic rate taxpayer would incur a tax bill of £60 on the £297 they exceeded their allowance. If interest were paid annually, there would be no bill to pay.

NS&I says it structures the bonds this way so that customers get the benefit of compound interest, something they wouldn’t get if interest was paid every year.

Savers investing their money in NS&I’s new British Savings Bonds could take advantage of a simple trick to dramatically reduce their interest tax bill.

Instead of the Guaranteed Growth Bond, savers could opt for the Guaranteed Income Bond, which pays a lower annual rate of 4.07 per cent, but pays interest monthly.

Several rival providers offer better deals. Oxbury and Hodge banks pay 4.66 per cent for their three-year fixed rate bonds, while at Close Brothers, RCI Bank and Hampshire Trust the rate is 4.65 per cent.

These better rates mean you’re missing out on up to £164 interest a year per £10,000 if you stick with NS&I.

Money Mail is campaigning for the personal savings allowance to be doubled from £1,000 to £2,000 so that savers who have prudently saved their savings will no longer face tax bills for their interest.

An estimated 2.7 million savers were hit by an interest tax bill for the first time in the last financial year, a million more than the previous year.