Martin Lewis shared his thoughts on Premium Bonds (Image: Getty)
Martin Lewis has set the record straight when it comes to tax on Premium Bonds. The prize fund rate for Premium Bonds currently sits at 3.6 percent, with the odds of each £1 Bond winning a prize at 22,000 to one.
One perk of the NS&I scheme is that all your prizes are tax-free, even for the larger prizes such as £100,000, £50,000 or even the £1million jackpot. As your winnings won’t attract a HMRC bill, the scheme can be particularly attractive for those who have used up their tax-free allowances, such as the yearly ISA allowance or your personal savings allowance.
A fan of Mr Lewis called into his BBC podcast with a question about how to best build up some savings for her two young children, who are both aged around 10. She said she was trying to “save in a tax efficient way” and that she was maxing out a junior ISA for the two youngsters.
Read more: Martin Lewis explains £10,000 pension rule
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 efforts to avoid a bill from the taxman, the caller explained that once she had maxed out the junior ISA for this tax year, she put around £1,500 into Premium Bonds. She said she understood that she had a very low chance of winning any prizes with such low holdings but she thought it’s “not at risk”.
Another benefit of Premium Bonds is provider NS&I is backed up by the Treasury, so all your funds are secure. Research from Mr Lewis’ MoneySavingExpert suggests with holdings of £1,000, you would win on average 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.
Responding to the caller, Mr Lewis warned not to be overly concerned about avoiding tax on her savings. He warned: “I think you may be slightly letting the tax tail wag the dog here.” The expert continued: “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 went on to say the £1,500 she had put into Bonds may perform better 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 right or wrong here, on that particular amount.” By putting the £1,500 in an account paying 5 percent, you would earn £75 in interest.
Even if you did strike it lucky with Premium Bonds, the vast majority of prizes in each draw are for small amounts such as £25 or £50. So even if you won a couple of prizes over the course of a year, your £1,500 may still get better returns in a savings account.
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