Hundreds of thousands face new NS&I tax bill over changes to Guaranteed Growth Bonds
National Savings & Investments changed the way its Guaranteed Growth Bonds worked 2 years ago
Hundreds of thousands of NS&I savers are at risk of being hit with unexpected tax bills.
The tax trap, first reported by our sister website This is Money last Friday, was caused after state-backed National Savings & Investments (NS&I) changed the way its popular Guaranteed Growth Bonds worked two years ago.
But many savers only became aware of the changes last month, when the tax risk was spelt out on their annual statement.
Around 700,000 savers, including many pensioners, have £16 billion tied up in the bonds. They are not on general sale, but those who already hold them can roll their money over into a new bond running for one, two, three or five years.
Prior to May 1, 2019, savers were allowed to access their money early if they paid a fee equivalent to 90 days’ interest. Any tax owed on the interest would be paid each year.
But a rule change two years ago meant savers were no longer allowed to access their money early. And, unbeknown to many savers, this changed how any interest earned is taxed.
Although the interest is still credited to your account each year, it is not taxable until the bond matures.
And this can mean you are at risk of breaching your annual personal savings allowance, which allows basic-rate taxpayers to earn up to £1,000 in interest a year tax-free. Higher-rate payers have a £500 allowance.
For example, if you bought a three-year bond in May 2019 which paid 1.95 per cent, you earn £195 interest in the first tear, £198 in year two and £203 in the final year (on a £10,000 investment).
Under the new regime, you’d be liable to pay tax on the total £597 when the bond matures, rather than on the smaller amounts earned each year.
This means higher-rate taxpayers will face a bill. Basic-rate payers may also have to pay tax if they use up more than £404 of their £1,000 savings allowance elsewhere that year.
Yet NS&I did not spell out the change or the tax risk when it changed its rules in May 2019. It took until September of that year to include any mention of the change in information sent to savers looking to renew their bonds.
There was just a one-line mention in a two-page summary box that read: ‘We add your interest without deducting any tax. However, the interest is taxable so it will count towards your personal savings allowance in the tax year that your bond matures.’
It was not until savers received their annual statements last month that NS&I spelt out the tax implications.
One Money Mail reader is now concerned he may have to pay tax on his interest when his bond matures in two years’ time. He says: ‘It is only when I received my annual statement this year that I realised the tax situation has dramatically changed.’
An NS&I spokesman says: ‘We were made aware that the tax treatment on the product had changed. When this came to light we made changes to the brochure, summary box and key features as soon as we were able.’