A fan asked Martin Lewis for help with how to build up their savings
Martin Lewis shared his thoughts on Premium Bonds(Image: ITV)
Martin Lewis has set out the rules over tax on Premium Bonds as he offered advice to a saver. The prize fund rate for Premium Bonds presently stands at 3.6 percent, with the chances of each £1 Bond scooping a prize at 22,000 to one. One advantage of the NS&I scheme is that all your winnings are tax-free, even for the bigger prizes such as £100,000, £50,000 or even the £1million jackpot.
Since your winnings won’t incur a HMRC bill, the scheme can be especially appealing for those who have exhausted their tax-free allowances, such as the annual ISA allowance or your personal savings allowance. A fan of Mr Lewis rang into his BBC podcast with a query about how to best grow a pot of savings for her two young children, who are both aged around 10.
She explained she was looking for ways to “save in a tax efficient way” and that she had already maxed out a junior ISA for the two youngsters. With ISAs, all your interest earnings or investment growth within these accounts is tax-free.
You can deposit up to £9,000 each financial year into a junior ISA. In her bid to dodge a bill from the taxman, the caller said that once she had maximised the junior ISA for this tax year, she placed around £1,500 into Premium Bonds.
She said she recognised that she had a very slim chance of winning any prizes with such modest holdings but at least the funds were “not at risk”. Another advantage of Premium Bonds is that provider NS&I is backed by the Treasury, meaning all your money is protected.
Research from Mr Lewis’ MoneySavingExpert suggests with holdings of £1,000, on average you would win nothing. Even with £10,000 in Bonds, you only get an average rate of return of three percent, winning potentially £300 in prizes a year.
Addressing the caller, Mr Lewis cautioned against being too worried about avoiding tax on her savings. He said: “I think you may be slightly letting the tax tail wag the dog here.”
The consumer advocate went on to explain: “You’re saying to me, I’ve put £1,500 in Premium Bonds even though the median return is likely to be zero, because it protects me from tax. You’re not going to pay any tax on zero return anyway, you’d be better to pay 20 percent tax on a four percent return than no tax on a zero percent return.”
Mr Lewis continued by suggesting the £1,500 she had invested in Bonds might deliver stronger results elsewhere. He said: “Of course, you might win in Premium Bonds, but with typical luck you won’t, so on that amount, I would probably be putting that into a Nationwide Flex Saver at 5 percent interest, or the Halifax Regular Saver that you can put money away for them in.
“That would be my instinct, there’s no rights or wrong here, on that particular amount.” By depositing the £1,500 in an account offering 5 percent, you would generate £75 a year in interest.
Even should you get fortunate with Premium Bonds, the overwhelming majority of prizes in each draw are for modest sums such as £25 or £50. So even if you bagged a couple of prizes throughout a year, your £1,500 could still achieve superior returns in a savings account.
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