Beware the hidden tax trap on NS&I’s ‘green’ bonds paying 5.7%

National Savings and Investments (NS&I) has launched Green Savings Bonds paying 5.7 per cent interest for three years. The new rate puts the bonds among the top-paying fixed-rate accounts.

As with every NS&I product, all deposits are completely protected by HM Treasury.

Money invested in Green Savings Bonds is passed on to the Treasury, which spends it on eco-friendly investments that reduce emissions from vehicles, prevent pollution and research new renewable energy sources.

But savers are being warned they could be landed with a shock tax bill when the bonds mature.

Money invested in Green Savings Bonds is passed on to the Treasury, which spends it on eco-friendly investments

As with all conventional savings accounts, interest earned on the Bonds is taxable once you have exceeded your Personal Savings Allowance.

The allowance permits basic‑rate taxpayers to earn up to £1,000 in interest tax-free. All interest earned above this is taxed at 20 per cent.

Higher-rate taxpayers pay 40 per cent tax on all interest earned above £500. Additional-rate taxpayers pay tax on all their interest.

The interest is rolled up and paid in one lump sum once the Bonds mature, so basic-rate taxpayers would have to pay tax in the third year if they had just £5,400 in Green Savings Bonds. 

Higher-rate taxpayers would pay tax with just £2,700 in savings. Additional-rate taxpayers would pay tax on every penny of interest earned.

Anna Bowes, co-founder of Savings Champion, says: ‘With this bond, all of the interest earned will count towards your taxable income in the year the bond matures, rather than being spread out over the term of the bond, even though interest is compounded each year.’

Money Mail believes it is unfair ordinary savers are forced to pay tax on modest, hard-earned nest eggs. We are calling for the tax-free allowance to be doubled to £2,000.

This would allow a basic-rate taxpayer to hold £10,120 in Green Savings Bonds without facing a tax bill.

Millions of savers are forced to pay tax on their savings as interest rates rise. More than 1.7million savers paid it last year — up 82 per cent in 12 months. And a million more are expected to be caught in the tax web this year, with as many as 1.4million basic-rate taxpayers facing a bill. 

Although the new Green Savings Bonds interest rate is generous, there are still some fixed-rate bonds that are slightly more competitive.

Recognise Bank offers the top rate of 6.05 per cent for a three-year fixed-rate bond, and the Bank of London and the Middle East and RCI Bank UK offer 6 per cent.

Savers who do not want to lock their money away can earn 6 per cent with a one-year fixed-rate bond from Charter Savings Bank.

NS&I also has several one-year bonds, including its Guaranteed Income and Guaranteed Growth bonds, which give savers who deposit between £500 and £1million a return of 5 per cent.

NS&I launched its first Green Savings Bonds in October 2021 with a rate of just 0.65 per cent. Savers can open an account with £100 and pay in up to £100,000. You cannot access your cash until the end of the term.

A saver with £10,000 in this account would have £11,809 after the three years.

Dax Harkins, NS&I chief executive, says: ‘These bonds are a great opportunity for savers who want to see a guaranteed return while also making a difference with their savings by helping to make the world greener, cleaner and more sustainable.’

To apply for Green Savings Bonds, visit nsandi.com or call 08085 007 007.

This post first appeared on Dailymail.co.uk