Britons warned one type of NS&I British Savings Bonds could spark ‘tax bill out of blue’

There are two types of British Savings Bonds - Guaranteed Growth Bonds and Guaranteed Income Bonds - and the interest is paid in different ways.

The former pays interest at maturity, after the three years.

But savers are urged be aware they could get a tax bill “out of the blue” as this option could see Britons paying more tax depending on their circumstances.

Sarah Coles, head of personal finance at Hargreaves Lansdown, said: “Savers in the British Savings Bond who opt for the Guaranteed Growth Bond at 4.15 per cent could end up faced with a tax bill out of the blue.

“You can opt for the Guaranteed Income Bond instead, which pays a lower rate of 4.07 per cent and pays the interest monthly, so your interest is spread over three years for tax purposes. But why would you?”

Ms Coles said savers could do better by using their £20,000 annual ISA allowance, and even then they could still make more in other three-year fixes.

For example, the bank UBL is paying 4.39 per cent, with a minimum savings of £2,000 for their fixed three year cash ISA, while Shawbrook Bank pays 4.38 per cent on its three-year ISA with a lower £1,000 minimum saving.

She added: “The British Savings Bond was never designed to be a market-beating blockbuster.

"It’s a mid-market offering that NS&I expects to have around for the long term, delivering modest sums at a relatively low cost to the taxpayer.”

Savers who put just £7,705 into NS&I Guaranteed Growth Bonds could be slapped with a tax bill in three years’ time, due to the way the bonds are structured, This Is Money reports.

Higher rate taxpayers will pay tax if they have just £3,852 in the new account.

Guaranteed Growth Bonds savers will only get the interest at the end of the three years, meaning they would be taxed as though all of the interest was earned in that tax year.

Most people can earn interest on their savings each year without paying tax. But if interest is paid all at once for combined years, this could take savers over their personal savings allowance.

Basic rate taxpayers can earn £1,000 in savings interest and not have to pay tax on it, via the personal savings allowance. This is reduced for earners in higher tax bands.

People paying higher rate tax can earn up to £500 in interest under the personal savings allowance.

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

It would mean savers would get £1,297 of interest from this savings option all at once.

As a result, a basic rate taxpayer would be left with a tax bill of £60 on the £297 that was over their personal allowance.

If the interest was paid out annually, there may be no bill to pay, depending on whether the saver earned interest from other savings accounts.

Britons can deposit savings between £500 up to £1million in British Savings Bonds. However, the money can't be withdrawn until the end of the three years so individuals should only lock away money they will not need access to.

LATEST DEVELOPMENTS:

• NS&I confirms ‘problems’ as customers complain they can’t access accounts
• NS&I launches new fixed British Savings Bonds
• NS&I shares details on British Savings Bonds including how interest is paid

NS&I says it structures the bonds in this way so that customers get the benefit of compound interest, which they would not if the interest was paid out every year.

The Money Saving Expert website warns: “Be aware: depending on your circumstances, choosing to have the interest paid in one go at maturity could mean you end up paying more tax.

“Unlike NS&I's Premium Bonds, where any prizes you win are tax-free, interest you earn from British Savings Bonds IS taxable.”

If someone feels they would be taxed, they could opt for NS&I’s Guaranteed Income Bonds.

The Guaranteed Income Bonds pay a lower rate of 4.07 per cent AER, but the interest is paid each month, instead of at the end of the three years.