The prize fund rate for Premium Bonds recently changed
Premium Bonds savers have been encouraged to check a crucial tax rule as they could get a HMRC bill. One of the main advantages of the savings scheme is that all winnings are tax-free, even for large sums such as £50,000, £100,000, or a £1million jackpot prize. However, depending on how you use the funds from your wins, you could end up with a tax bill.
Finance experts at Octopus Money have reminded savers to be mindful of their tax allowances. Tom Francis, head of personal finance, said: “Where tax could come into play is if you move your winnings into a savings account and start earning interest.
“Many people forget about their personal savings allowance – the amount of interest you can earn each year tax-free.” Those on the basic rate for income tax can earn up to £1,000 in interest over a year without having to pay any tax.
The allowance decreases to £500 for higher rate taxpayers while additional rate taxpayers receive no allowance, meaning they pay tax on all their savings growth. Mr Francis explained: “Keeping maths nice and simple, if you’re a basic rate taxpayer with a savings account paying 4% interest, you could hold around £25,000 in savings before you’d start paying tax on the interest.
“Unless you’ve already maxed out your allowance, Premium Bond winnings won’t trigger a tax bill.” If you had £25,000 in savings, this would generate £1,000 a year in interest, using up all your savings allowance.
Any interest earnings above this amount would be taxed at 20 percent. However, you can build up your savings while avoiding a tax bill if you put your Premium Bonds winnings into ISAs.
What are the advantages of ISAs for Premium Bonds savers?
These accounts are entirely tax-free, with no tax to pay on any interest earnings or investment growth within an ISA wrapper. Mr Francis said: “For security, a cash ISA is a great starting point: your money’s protected, you’ll earn interest, and right now many accounts are paying around 4 percent or more, with higher rates available on fixed-term deals.
“If you’re happy to take a bit more risk for the potential of stronger long-term growth, a stocks and shares ISA allows you to invest up to £20,000 a year tax-free – giving your winnings a real chance of outpacing inflation.” The prize fund rate for Premium Bonds recently fell from 3.8 percent down to the current 3.6 percent.
The odds of each £1 Bond winning stayed the same at 22,000 to one.