Martin Lewis, founder of Money Saving Expert (MSE), has provided an important update regarding the tax implications for Premium Bonds holders from National Savings and Investments (NS&I). Although Premium Bonds are a popular choice due to their tax-free prizes, questions remain around the taxation of winnings and interest from other savings products.
Understanding Premium Bonds and Tax-Free Prizes
Premium Bonds, offered by NS&I, are popular in the UK for their unique structure where bondholders are entered into monthly prize draws instead of earning interest. The prizes from Premium Bonds are tax-free, regardless of the amount won. This makes them a preferred option for savers looking to avoid tax on their savings income.
NS&I currently has over 24 million customers, with Premium Bonds being one of its most well-known products.
Taxation of Interest on Other Savings Products
While Premium Bonds provide tax-free winnings, other NS&I products, such as Guaranteed Income Bonds and Guaranteed Growth Bonds, generate taxable interest. These interest payments are subject to the Personal Savings Allowance (PSA), introduced on 6 April 2016.
Under the PSA :
- Basic rate taxpayers can earn up to £1,000 in interest tax-free.
- Higher rate taxpayers are allowed £500 tax-free.
- Additional rate taxpayers do not receive a tax-free savings allowance.
NS&I bonds pay interest in two ways :
- Guaranteed Income Bonds pay interest monthly into a linked current account.
- Guaranteed Growth Bonds reinvest interest annually, accessible only when the bond matures.
The timing of interest access is important for tax purposes, as it is taxed in the year it becomes available.
Maximising Security and Tax Efficiency in Savings
NS&I offers a unique advantage in terms of security, guaranteeing 100% of an individual’s savings, regardless of the amount. In comparison, most UK banks guarantee deposits up to £85,000 per institution under the Financial Services Compensation Scheme (FSCS). This additional security is backed by HM Treasury.
NS&I’s website states: “We’ve been helping people save for over 160 years. Today, over 24 million customers save with us.”
Maximising Savings Efficiency
To optimise savings while minimising tax liabilities, savers can combine tax-free products like ISAs and Premium Bonds with other taxable accounts. Key distinctions include:
- ISAs (Individual Savings Accounts): Allow contributions up to £20,000 (for the 2023/2024 tax year) with all interest, dividends, and gains remaining tax-free.
- Premium Bonds: Offer a prize rate of 1.40% (as of the latest update), with all winnings tax-free.
For higher-rate taxpayers or those close to their PSA limit, these tax-efficient options offer significant advantages.
NS&I’s Response to Changing Interest Rates
Interest rates have influenced savings strategies, with NS&I maintaining competitive rates for its products. Additionally, the Premium Bonds prize structure has been adapted, with millions of smaller prizes and fewer high-value awards. This ensures broad accessibility while maintaining the appeal of Premium Bonds.
Martin Lewis’ Advice on Maximising Savings Returns
Martin Lewis and MSE advise : “Understand the structure and tax treatment of your savings to make informed decisions.”
Understanding the structure and tax treatment of savings’ products is key to making informed financial decisions. Savers should consider the tax implications and security of options like NS&I, Premium Bonds, and ISAs. Combining tax-free savings and taxable accounts can help optimise savings and reduce tax exposure.
