Premium Bonds savers could get an unexpected tax bill even though all prizes through the scheme are tax-free. All Premium Bonds prizes are tax-free, including the large cash prizes for amounts such as £50,000 or £100,000, or the £1 million jackpots. But you could soon end up with a tax bill depending on how you use your prize funds.
Aaron Peake, personal finance expert at free credit score service CredAbility, warned: “The prize itself is always tax free, but how you use it afterwards could create a tax bill down the line.” He explained how simply moving your winnings into a savings account could result in a 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. 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, if your income is above £17,570. If you won a £100,000 prize through Premium Bonds, you may want to put this in an easy access account so you can quickly get at the funds at a later stage, and there are several easy access accounts currently paying four per cent interest or above.
Putting your £100,000 prize into an account paying four per cent would earn you £4,000 in interest over the course of a year – of which £3,000 would be eligible for income tax. This means you would have to pay £600 in tax on the amount.
If you are on the higher rate for income tax, you can only earn up to £500 in interest each financial year, and the tax rate on your savings would be 45 per cent. Additional rate taxpayers don’t get any savings allowance, with a 40 per cent bill on their savings growth.
Fortunately, there are some things you can do to protect your Premium Bond wins from the taxman. One is to reinvest your winnings in buying more Bonds. You can hold up to £50,000 in Premium Bonds, and by buying more, you increase your chances of winning again.
You can set up your account so any winning funds are automatically used to buy more Bonds. If you do this, one advantage is your new Bonds will be eligible from next month’s draw, rather than having to wait a full calendar month for them to be eligible.
Mr Peake shared some other ideas for using your winnings in a tax-efficient way. 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 can also be a “smart move” to put the funds into an ISA.
Any savings growth or investment growth through 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.”
Those planning for their later years may also 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.”
