Savers have been urged to read up the tax allowances that apply to them
Premium Bonds savers could face an unexpected tax bill – despite all prizes through the scheme being tax-free. There is no tax to pay to receive a Premium Bonds prize, including for large cash amounts such as £50,000 or £100,000, or even a £1 million jackpot.
However, you could end up with a tax bill depending on how you use your prize money. Aaron Peake, personal finance expert at free credit score service CredAbility, said: “The prize itself is always tax free, but how you use it afterwards could create a tax bill down the line.”
He outlined how simply depositing your winnings into a savings account could result in an HMRC bill. Mr Peake said: “If you stick your winnings into a savings account, then the interest you earn could become taxable once you’ve used up your allowance.
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“For example, if you’ve already maxed out your personal savings allowance for the year, any extra interest from banking your Premium Bonds prize would be taxable.” A basic rate taxpayer for income tax can earn up to £1,000 a year in interest tax-free, provided their income exceeds £17,570.
Should you win a £100,000 prize through Premium Bonds, you may consider putting the amount in an easy access account, so you can quickly access the funds later. There are many easy access accounts currently offering four per cent interest or higher.
Stashing your £100,000 windfall into an account offering for per cent would generate £4,000 in interest annually – £3,000 of which would be liable for income tax. This means you’d face a £600 tax bill on the earnings.
The system is even less generous for higher earners. Those on the higher rate for income tax can only earn up to £500 in interest each tax year, facing 40 per cent tax rate on their savings.
Additional rate taxpayers receive no savings allowance whatsoever, with a 45 per cent charge on their savings growth. Thankfully, there are several strategies you can use to shield your Premium Bond winnings from HMRC.
One option is to reinvest your winnings back into purchasing more Bonds. You can hold up to £50,000 in Premium Bonds, and acquiring more boosts your odds of bagging another win.
You can arrange your account so any prize money automatically goes towards buying more Bonds. One benefit of this approach is that your new Bonds become eligible for next month’s draw, rather than having to wait a full calendar month for your Bonds to be eligible.
‘A smart move’
Mr Peake shared some other tips to move around your winnings without attracting a tax bill. He said: “You could look at paying down debts, particularly those with high interest rates like credit cards.
“That’s effectively giving yourself a guaranteed return, which can sometimes be better than chasing interest on savings.” He said it would also be a “smart move” to move the funds into an ISA.
Any growth in your savings or investments within an ISA is tax-free. You can deposit up to £20,000 a year into ISA accounts.
Mr Peake said: “Cash ISAs let you earn interest tax free, while stocks and shares ISAs can be a way to grow your money over the long term without paying tax on gains. Using your winnings to build up your ISA pot keeps the tax benefits going.”
He also suggested that those planning for their later years may be able to move the cash around without attracting a HMRC bill. The expert said: “For those looking at retirement planning, putting some of a big Premium Bonds win into a pension could also be tax efficient, especially if you qualify for tax relief on your contributions.”