Guaranteed Growth Bonds: interest payment change means bigger tax bills for savers

Switch in the way that interest is treated means that savers with big pots may find they get a less substantial return.

It’s been an up and down year for National Savings & Investments (NS&I). 

As a Government-backed provider, it is given targets for how much money it is supposed to bring in for savers each year, and that target then dictates how competitive the interest rates offered on NS&I’s deals are.

As the pandemic hit last year, its funding target was dramatically hiked, before it became clear that too many savers were joining, so rates were slashed. It’s turned into something of a hokey cokey.

But NS&I remains enormously popular with savers precisely because of how different it is, and the extra protection it offers. 

However, it has now emerged that thousands of savers who have put their money into a particular type of savings account from NS&I may be facing an unwelcome tax charge.

Less growth from my Guaranteed Growth Bonds

It all comes down to the way that interest is paid on NS&I’s Guaranteed Growth Bonds.

These bonds are available across a range of terms, from one year to five years. It used to be the case that, from a tax perspective, the interest earned on the bond was treated as if it was paid on an annual basis.

So for example, if I have money in a three-year bond, even though I don’t actually receive the interest until the bond matures, NS&I treated it as if I was paid that interest at the end of each of those three years.

However, a couple of years ago that changed. Back in May 2019, the terms were shifted, so that interest would only be classed as being earned and paid in the year in which the bond matures.

So to take my three-year bond example, I wouldn’t technically earn interest in the first two years; instead, I’d get it all in one go once the bond matures in year three.

Why does that matter?

On the face of it, that seems a pretty innocuous change, doesn’t it? A bit of small print jiggery-pokery that you wouldn’t think twice about.

However, the experts at SavingsChampion have warned that it can have some serious consequences for the return you get from your savings.

The personal savings allowance means that you can earn £1,000 in interest from your savings, absolutely tax-free, each year (dropping to £500 for higher rate taxpayers). What you bring in above that mark is then charged at your rate of Income Tax.

Now, having the interest from your Growth Bond split across three years in my example above inevitably makes it much more difficult to fall foul of this limit than if it’s all paid in one go.

As Anna Bowes, founder of SavingsChampion, told ThisisMoney: “If you had £50,000 earning 0.4% for three years, rather than receiving approximately £200 in gross interest each year which would count towards your personal savings allowance, you would instead receive just over £600 in the final year.”

And for higher rate taxpayers, that means an unpleasant tax shock.

Is this really going to impact many savers?

NS&I is one of the nation’s favourite savings providers precisely because of its position as a Government-backed bank.

That means that every penny you save with the firm is protected, unlike with other financial institutions where the level of protection is limited by the Financial Savings Compensation Scheme cap of £85,000.

And that means that it presents an attractive option for those with significant pots of savings.

Sure, you’ll never get a market-leading rate, but won’t have to divide the money between a handful of accounts, regularly shopping around and shifting them in order to get a decent return.

According to NS&I, there are almost 700,000 Growth Bonds active at the moment, with the average saver stashing away more than £20,000.

There will inevitably be plenty of savers sat on some pretty impressive savings pots who are about to see their returns sliced as a result of having to pay tax on the interest. 

And as interest rates start to rise, it’s likely that even more savers will find those Guaranteed Growth Bonds deliver a little less growth than they had been expecting.