Taxing your savings

Dominic Thomas
Feb 2023 • 10 min read

Prize – Back to winning ways? Or simply more tax on your savings?

Despite the cold weather and general sense of grey, there are some silver linings. On 24^th January 2023 NS&I increased the interest rates on various accounts.

If you are one of the 870,000 or so people who hold NS&I’s Direct Saver, Income Bonds or Direct Cash ISA, you will now get a little more interest. The interest rate paid on Direct Saver and Income Bonds will increase from 2.30% to 2.60%, whilst the interest rate on Direct ISA will increase from 1.75% tax-free to 2.15% tax-free.

Those of you who like Premium Bonds and remain optimistic of jackpot winnings (less likely than being struck by lightning), the prize fund rate will also increase from 3.00% to 3.15%, effective from the February 2023 prize draw. This follows the rate increasing from 2.20% to 3.00% on New Year’s Day.

NS&I has also increased the interest rate that it pays on its Junior Cash ISA from 2.70% tax-free to 3.40% tax-free, meaning that 80,000 under 18s will benefit from extra interest on their savings, though why anyone would want to hold cash for 18 years is beyond me …

Media spin means that we can confidently say that “today’s changes mean that Income Bonds are now paying their highest rate of interest since 2008” which is of course since the infamous credit crunch. The prize fund on premium bonds is also at its highest level since the great crunch.

The odds of each £1 Bond winning any prize will remain fixed at 24,000 to 1, with the changes meaning that the number of prizes worth £50 to £100,000 will increase from next month’s draw (February 2023). In short, if you have at least £24,000 in Premium Bonds you would be unlucky not to win at least £25 (the smallest but most common prize, paid out on over 2.6m Premium Bonds).

There are an estimated 119 billion premium bonds in issuance. The £1m jackpot is paid out on two bonds every month. So there is roughly a 1 in 59 billion chance of winning the jackpot in any month. It will not surprise you that I don’t believe that reliance on such odds is a good strategy for your future, but I certainly would acknowledge that it’s a little bit of fun.

Current and new Premium Bonds prize fund rate and odds:

Current prize fund rate	Current odds	New prize fund rate (from February 2023)	Odds from February 2023 (no change)
3.00% tax-free	24,000 to 1	3.15% tax-free	24,000 to 1

Number and value of Premium Bonds prizes:

Value of prizes in January 2023	Number of prizes in January 2023	Value of prizes in February 2023 (estimated)	Number of prizes in February 2023 (estimated)
£1,000,000	2	£1,000,000	2
£100,000	56	£100,000	59
£50,000	111	£50,000	117
£25,000	224	£25,000	236
£10,000	559	£10,000	590
£5,000	1,116	£5,000	1,177
£1,000	11,968	£1,000	12,573
£500	35,904	£500	37,719
£100	1,159,432	£100	1,280,509
£50	1,159,432	£50	1,280,509
£25	2,617,902	£25	2,376,161
Total £299,202,350	Total 4,986,706	Total £314,347,875	Total 4,989,652

Variable rate savings products:

Product	Previous interest rate	Interest rate from today (24 January 2023)
Direct Saver	2.30% gross/AER	2.60% gross/AER
Income Bonds	2.30% gross/2.32% AER	2.60% gross/2.63% AER
Direct ISA	1.75% tax-free/AER	2.15% tax-free/AER
Junior ISA	2.70% tax-free/AER	3.40% tax-free/AER

Can you get better rates elsewhere? Of course you can! Remember that non-taxpayers and basic rate taxpayers have the personal savings allowance in 2022/23 of £1,000 of tax-free interest. At an interest rate of say 3%, you would need £33,333 on deposit before tax is triggered. Higher rate taxpayers only have £500 of the allowance, so at an interest rate of 3%, you would only need £16,660 on deposit before tax is triggered. A year ago, you would have been hard pressed to be taxed on £100,000 of savings when interest rates were under 1%.

BACK TO ALL BLOGS

Taxing your savingsJemima Thomas2023-12-01T12:12:38+00:00

IT COULD BE YOU… BUT ITS UNLIKELY

TODAY’S BLOG

IT COULD BE YOU… BUT ITS UNLIKELY

If you have been a client for more than a week, you will have gathered that I like, want and encourage clients to hold some cash. The key word is some. This will be different for everyone and depend on several things. Your planned projects over the next 36 months and the emergency buffer you believe is appropriate should your employed (or self-employed) income cease. If you draw a pension from an annuity, the State or an old final salary pension, those are guaranteed and won’t stop until you do.

10 YEARS ON

Cash rates as we all know have been very low for a decade or so now. Holding cash in a world of rising costs over the “long-term” isn’t good for your wealth. By way of comparison 10 years ago a first-class stamp was 46p, today it is 85p…. ah you sensibly plan ahead and use second class, 36p has become 66p.

If I am generous about cash deposit rates, using a Cash ISA rate, a typical “decent” rate in 2011 was 2.75% today its about 0.4%. Remember, costs have gone up, the interest you have been getting has reduced. Holding cash for 10 years… that warrants a discussion, but let’s just assume it’s the same emergency “help me sleep at night” reserve. In June 2011 the rate of inflation in the UK was 4.2% today (data from May 2021) it’s around 2.1% and you will have likely heard some noise about it rising having jumped from 0.5% in February.

FEAR IS EATING YOUR WEALTH

There is no way that I would attempt to encourage you to place all of your money into investments, but unless you are preparing for Armageddon, I cannot see much logic in holding large sums. We can help get better rates for those with sums over £100,000 but its still peanuts, even using a decent cash management platform.

PREMIUM BONDS

Some of you like NS&I Premium Bonds. They are a bit of fun, the Government’s way of raising money without raising taxes, borrowing from taxpayers. Whilst NS&I are not backed by the FSCS cover of £85,000, they are backed by HM Treasury, so… pretty safe. Premium Bonds are really a lottery without loss of your stake money. The chance of your Bond winning even the smallest prize is now 34,500:1…. Rather less than your chance of contracting covid or going on holiday. So to have a reasonable chance you need at least £34,500 in Premium Bonds and preferably £50,000 (the maximum).

We are a small firm, so the sample size may not be terribly helpful, but in the 30 years or so (over 360 draws) that I have been doing this, not a single client has won more than £1,000 from a single Premium Bond. None of our clients have won prizes in the high value band (£5,000 to the two £1m jackpots each month).

I do understand that there is a charm about Premium Bonds, but the maths just doesn’t stack up for you. There are 25million NS&I customers – that’s getting towards half of the UK. The draw for June saw the usual 2 jackpot winners and a further 190 people that won £5,000 or more. The bulk of “winners” some 3,101,040 of them won £25 (97.89% of winners win £25). The total winnings (all prizes) was £91m.. which sounds a lot until you realise that £77.5m is those £25 payments. There were, wait for it.. 109,286million entries (qualifying £1 Premium Bonds). The chance of winning anything is certainly 3.1m in 109,286 million… that is a very small chance of winning. Most think of the big £1m jackpot, the chance in June was effectively 1 in 54,643,229,674, yes you get a bite at the same pie each month, but so does everyone else. So to put this in context you are 1 in 67,081,000 as a member of the UK population and you might be picked for a gong or almost anything.

The other thing that people forget is that £1m, which for most of us would be nice to have! isn’t the same value as £1m in 2011. It buys you rather less because of the decade of inflation, yet the prizes don’t really increase, because they are nice, neat, round numbers. Its a bit like the TV gameshow “Who Wants To Be A Millionnaire?” which first aired on 4 September 1998… thats now nearly 23 years ago! A million isn’t what it was, yet all of us were brought up to believe that it was a vast sum of money, which when we were children, it was. In fact £1m in 1998 is about the same as £1,840,000 now, but that doesn’t make a good strap-line for a TV show does it. To put it another way £543,478 now (roughly) was £1m in 1998.

The truth (remember I promised you that) however uncomfortable it is, is that holding cash will provide the sense of security but you will experience your spending power reduce each year. Admittedly not all the things we buy rise at the rate of Royal Mail, but have your basic costs really reduced or stood still? I suspect not.

You need to use your money in assets that grow and generate wealth. Talk to me.

Dominic Thomas
Solomons IFA

You can read more articles about Pensions, Wealth Management, Retirement, Investments, Financial Planning and Estate Planning on my blog which gets updated every week. If you would like to talk to me about your personal wealth planning and how we can make you stay wealthier for longer then please get in touch by calling 08000 736 273 or email info@solomonsifa.co.uk

GET IN TOUCH

Solomon’s Independent Financial Advisers
The Old Bakery, 2D Edna Road, Raynes Park, London, SW20 8BT

Email – info@solomonsifa.co.uk
Call – 020 8542 8084

7 QUESTIONS, NO WAFFLE

Are we a good fit for you?

Take Survey

PRIVACY POLICY | DATA PROTECTION

GET IN TOUCH

Solomon’s Independent Financial Advisers
The Old Bakery, 2D Edna Road, Raynes Park, London, SW20 8BT

Email – info@solomonsifa.co.uk Call – 020 8542 8084

7 QUESTIONS, NO WAFFLE

Are we a good fit for you?

Take Survey

PRIVACY POLICY | DATA PROTECTION

IT COULD BE YOU… BUT ITS UNLIKELYDominic2023-12-01T12:13:06+00:00

Cash Deposits – in defence of Premium Bonds

We all know that interest rates are depressingly low for savers (though good news for borrowers). There has been some coverage of National Savings Premium Bonds which has been rather unfavourable, so I thought that I would provide my thoughts on this.

As with all cash deposits, cash as a long-term investment strategy is not a good idea. Why? simply because of inflation. If interest rates are 2% and inflation is 3% then in real terms you are losing money each year, by losing I mean your £1 has less purchase power. So can we agree that cash holdings are for emergency funds, for people that are very anxious about other forms of investing and for planned major expenses. There are no rules or rights or wrongs, but holding cash is sensible for anyone, as it provides liquidity (rather than having to borrow or sell assets).

Turning to Premium Bonds. These are very basic, you buy each bond for £1. You can hold up to 30,000 so £30,000. You are not guaranteed any interest – indeed there is no interest at all. However, your £1 bond with its unique number is automatically entered into a draw. Each month someone wins £1m. Most don’t win at all, but in general those with the full £30,000 allowance tend to win small prizes, which over the year amount to about £450 (1.50% of £30,000). This money is tax free. So for a 20% taxpayer is equivalent to 1.875% gross and a 40% taxpayer equivalent to 2.50% gross. These rates are best compared against monthly interest paying accounts with 30 day notice. You will find very few accounts paying these sorts of rates. Sure a little bit more in a few instances, but not much. Given that we are talking about £30,000 an extra 0.5% is worth £150 over a year… not a significant sum when you consider that it would be taxable, involve the hassle of opening a new account and removes you from the possibility of winning £1m. I might add, that it is also a bit of fun, opening an envelope to discover your winnings. More fun than opening a bank statement, or indeed one of our portfolio valuations (unless you find particular joy in this exercise). Last month someone won £1m, 5 people won £100,000, 9 won £50,000, 18 won £25,000, 48 won £10,000 and 93 won £5,000. The smallest prize (£25) was paid out to nearly1.8m people in June alone.

The news is that the chances of “winning” (from £25) will reduce from 24,000:1 to 26,000:1 on August 1st 2013. As a result the current appropriate 1.5% rate is now more like 1.30%. So on £30,000 you might expect £390 of tax free winnings over a year. To a basic rate (20%) taxpayer this is equivalent to 1.625% and a 40% taxpayer equivalent to 2.16%. These are still decent rates. Sure nothing to write home about, but pretty competitive never-the-less.

Yes the rates are poor, but then that’s true of all similar types of accounts. As I have said cash is not a long-term investment strategy, it is a helpful emergency reserve and buffer. Whatever the economic climate, holding some cash would be entirely sensible. The question is really about having a properly thought through investment strategy that enables you to achieve your goals.

So please remember, this is not advice to rush out and buy premium bonds. This is my opinion in response to some negative coverage about them.Unlike the lottery you get your money back, the same money is re-entered into the draw each month. For the record, none of our clients have yet won the £1m jackpot and I would not advise anyone to rely on winning a jackpot as an appropriate form of providing for your future…that’s just wishful thinking.

Dominic Thomas: Solomons IFA

Cash Deposits – in defence of Premium BondsDominic2023-12-01T12:23:47+00:00