NS&I Guaranteed Growth Bonds could trigger savings tax bill - are you affected?

Savers with NS&I's popular Guaranteed Growth Bonds could be hit with a surprise tax bill thanks to changes to the way the account can be accessed and how it pays interest.

In May 2019, NS&I altered the terms and conditions of the account to remove the ability to cash in the bonds before the end of the fixed term. The tweak made the bonds less flexible but they also changed the tax liability for savers, and we've heard complaints that this wasn't communicated clearly enough.

While these accounts, which offered up to 2.25% AER, are no longer open to new customers, many people still have them. The fixed-rate bonds have terms of one, two, three or five years, so savers with maturing two-year deals may have only just started to notice the impact of the changes.

Here, Which? explains how NS&I's changes could trigger a tax bill and what action you can take if you are affected.

How have Guaranteed Growth bonds changed?

On 1 May 2019, NS&I changed the terms and conditions of its Guaranteed Growth and Guaranteed Income bonds, so any customers renewing an existing bond or opening a new investment would no longer be able to withdraw their funds early.

Previously Guaranteed Growth Bonds had paid interest annually but under the new rules interest would be paid at maturity.

Existing Guaranteed Growth Bond savers were given the option to cancel within 30 days of renewing a bond, as instead of interest being paid every year it would be paid all in one go when the bonds matured, which could trigger a big tax bill.

An NS&I spokesperson told Which?: 'NS&I made the changes to the terms and conditions of Guaranteed Growth Bonds and Guaranteed Income Bonds from 1 May 2019 to bring the product in line with other fixed-term products in the financial sector that were on sale at the time.

'NS&I recognised at the time that committing to a fixed-term investment is an important decision, so from 1 May 2019, gave Guaranteed Growth Bonds customers the opportunity to change their mind about their investment within the first 30 days of either purchasing or reinvesting into a new Bond.'

• Find out more: NS&I announces major shake-up to its Guaranteed Growth and Income bonds
  

How could this affect your tax bill?

Being paid your interest as a lump sum, rather than spread out across several years, could mean some savers will exceed their personal savings allowance.

This is the tax-free amount of savings interest you can earn in each tax year, but it varies depending on your income tax band.

Basic-rate taxpayers have a personal savings allowance of £1,000, but if you pay higher-rate tax this reduces to £500, and additional-rate taxpayers don't receive any allowance at all.

At the time the Guaranteed Growth bonds offered competitive rates of interest and allowed investors to save up to £10,000 in a bond.

_{Source: NS&I historical interest rates}

So if you paid £10,000 into a five-year bond paying 2.25% AER under the old system you would get £227.54 after a year and you wouldn't have to pay any tax unless you were an additional-rate taxpayer.

But under the new system, you wouldn't be paid interest after a year, you would get £1,190.68 at the end of the term and you'd be liable o pay tax on the amount exceeding your savings allowance - basic-rate taxpayers would pay tax on £190.68, and higher-rate taxpayers would pay tax on £690.68.

The impact on other taxes

However, the tax implications don't stop there. If you earn more than £10,000 in savings interest, you must declare this on a self-assessment tax return. As savings interest is considered to be part of your overall income, it could also tip you into a higher tax band if your other income means you're near a higher threshold.

So, if your savings income pushed you from the basic-rate to the higher-rate tax band, it would make you a higher-rate taxpayer. This would reduce the amount of personal savings allowance you're entitled to, and have a knock-on effect on other taxes where rates are based on your income tax band, such as capital gains tax and dividend tax.

A seemingly small increase in savings interest income could, in particularly unfortunate circumstances, have a pretty huge impact on the overall amount of tax someone has to pay.

• Find out more:personal savings allowance and tax on savings interest
  

How was the change communicated?

Which? has heard from a saver that claims the implications of the change weren't made explicit enough.

When we asked NS&I about how the change was communicated it admitted it was not initially made clear to customers investing or renewing into a new term between 1 May - 1 September 2019.

From 2 September 2019, information about the tax treatment of Guaranteed Growth Bonds was included on both the Summary Boxand also within theKey Features document. This information was published for new customers and sent to customers with maturing bonds alongside their options.

NS&I also told Which? the information about the tax treatment of Guaranteed Growth Bonds was then included within annual statements sent to customers in April 2021.

Additionally, it wrote to customers on 20 April 2021 who had either purchased Guaranteed Growth Bonds for the first time or renewed into a new term of the product from 1 May 2019 - 1 September 2019 to explain how the tax treatment on the product now worked. However, in this communication information was not included for existing customers to cash in their holding penalty-free within 30 days if the customer decided that the product was no longer appropriate for them.

In light of this, NS&I says it is in the process of reviewing its communications to customers.

• Find out more:what is National Savings & Investments?

HMRC isn't to blame

Which? has heard from an NS&I saver who claims the tax implications of the change weren't communicated clearly at the time they invested. When the customer complained to NS&I its final response letter indicated that the issue was decided by HMRC

The letter stated: 'It may help if I explain that HM Revenue & Customs (HMRC) previously treated interest on Guaranteed Growth Bonds (GGB) as being received annually, but as customers are no longer able to access the funds before the Bond matures, HMRC have confirmed that all interest will be treated as being received in the year of maturity. This was decided by HMRC.'

When Which? queried this, NS&I told us the information included within this customer's final response letter was incorrect as the change in the tax treatment was because of NS&I's change of terms and conditions.

NS&I says its complaints team has been informed that this is wrong and will ensure that future response letters reflect the right information.

What can you do if you're affected?

If you've recently reinvested in Guaranteed Growth Bonds within the past 30 days and have changed your mind about keeping the account for its full term, you should be able to contact NS&I and ask to cancel the account.

If you hold Guaranteed Growth Bonds and your term started on or after 1 May 2019, and you've held them for longer than 30 days, you won't be able to access your cash early, as stated in the product's terms and conditions.

We've heard of an instance where a customer made a complaint to NS&I about the change to the way interest had been paid on their maturing Guaranteed Growth Bonds, and the provider responded by issuing £25 in compensation. We asked NS&I whether this is standard practice, and it told us any complaints will be dealt with on a case-by-case basis.

If you're unhappy with the terms of your Guaranteed Growth Bonds, you can also make a complaint to NS&I. If you do not feel you're offered a suitable response, you can make a complaint to the Financial Ombudsman Service (FOS).

NS&I told us that customers that are worried about how this change might affect them may consider either speaking to HMRC or seek independent financial advice.

• Find out more:how to complain to the Financial Ombudsman Service

What can you do to reduce your tax liability?

As it's no longer possible to withdraw cash in Guaranteed Growth Bonds early, there's little you can do about the tax bill that may come as a result of the savings interest you earn - but, you can make the most of tax-free savings.

All money held in an 'Isa wrapper' is tax-free, regardless of how much interest it earns. So, if you have other savings accounts in addition to your NS&I Guaranteed Growth Bond, and haven't already used your 2021-22 Isa allowance, it's a good opportunity to move up to £20,000 into an Isa. Our guide can help you find the best cash Isas on the market.

If you have a longer-term Guaranteed Growth Bond, you'll be able to move up to £20,000 from the beginning of each tax year once your Isa allowance renews. Everyone receives the same Isa allowance, regardless of their income tax band.

Depending on your other sources of income, there may be other tax allowances, expenses and reliefs you'll qualify for - make sure you're fully clued up on what you can claim so you don't end up paying more tax than you need to.

• Find out more:35 ways to save on tax