Whether you put in £500 or £1,000,000, your money is completely secure and backed by HM Treasury. In contrast, FSCS protection typically protects your deposits up to £85,000. One benefit of depositing some of your money with NS&I instead is that all the funds you deposit are secure, even if you deposit more than £85,000.
The new British Savings Bonds were first announced by Chancellor of the Exchequer Jeremy Hunt during his Spring Budget. The British Savings Bonds, along with the planned UK ISA which could increase the tax-free ISA allowance by £5,000, are designed to help people save whilst encouraging investment into the UK.
The two bonds on offer work slightly differently. These include the Guaranteed Income Bonds with a 4.15% AER (4.07% Gross) fixed interest rate for three years, as well as the Guaranteed Growth Bonds also with a 4.15% AER fixed interest rate for three years.
How do the new British Savings Bonds work?
The British Savings Bonds offer you two ways to earn 4.15% AER fixed interest on your savings for 3 years. Each bond costs £500. This means you can invest between £500 and £1,000,000 and the original interest rate won't change. However, your bonds will be locked away for three years and you will not be able to withdraw the funds during this period.
You can't keep adding to your original bonds once you've purchased them, but you can buy more bonds with a new maturity date at a later time as long as you don't surpass the £1,000,000 limit and as long as they are still on sale. NS&I reserves the right to change the interest rate for new bonds you buy further down the line, but once you've purchased them, the interest rate won't change throughout the term.
So, let's say you have £10,000 to save right now and you buy £10,000 worth of bonds. These bonds will mature in three years and you will regain access to your funds at that point. But, if a year from now these bonds are still available and you wish to buy a further £10,000 worth of bonds, then the bond you buy a year from now will mature in another three years. Effectively, you'll have two different maturity dates, a year apart from each other.
The guaranteed income bonds and guaranteed growth bonds work slightly differently depending on whether you're looking for a fixed monthly income or a payout at the end of the term.
Guaranteed Income Bonds
Guaranteed Income Bonds allow you to earn a fixed monthly income for the length of the bond term. The interest you earn isn't added to your savings, instead, you will be paid out what you've earned on a monthly basis. The interest you earn from the bond is subject to income tax and you won't be able to access your money during the term.
However, because the interest is paid out every month rather than when your bond matures, you may be able to lower your tax bill if you're investing a larger amount that would push you over the personal savings allowance if you had to pay tax on the interest on maturity. We discuss the personal savings allowance in more detail below.
Guaranteed Growth Bonds
Guaranteed Growth Bonds pay you the interest you accrue at the end of the fixed period. The interest is taxable when your Bond matures even though it is calculated daily and added to your Bond on a yearly basis. This is because you can't access the interest until your Bond matures. Once it matures, you need to declare the interest you've earned for that specific tax year and pay income tax on the amount above your personal savings allowance.
This could work well if you don't anticipate you'll earn more than your personal savings allowance anyway. It also allows your savings to build up over time with less temptation to spend the interest earned.
How do you apply for the British Savings Bonds?
Applying for the British Savings Bonds is fairly straightforward. You can apply by yourself or apply jointly with one other person. You're likely to be eligible if you:
- Are aged 16 or over
- Have at least £500 to invest
- Are happy to apply for and manage your bonds online
- Can pay by a debit card held in your own name and issued by a UK bank
You can apply for the British Savings Bonds via the NS&I website. You'll need certain documentation, such as:
- Your NS&I number if you have one already
- Your address
- Your date of birth
- Your UK bank details (must be registered to your current address)
- Your UK debit card
Once you complete the application, it'll take between 7 to 10 working days to process your application. You might need to provide additional documentation to prove your identity and address as part of this process which you can upload on the platform or send via post.
What makes the British Savings Bonds "British"?
According to NS&I, the bonds are referred to as "British" because that is the umbrella term the Chancellor used when he announced the two bonds during the Spring Budget. NS&I also states that your savings will be invested into "supporting the UK". The British Bonds were launched as part of a wider campaign to encourage investment into the UK, and the fact that they are administered by the NS&I speaks to this effort.
Will you have to pay tax on the new British Savings Bonds?
You will need to pay income tax on the interest you earn from the new British Savings Bonds if you surpass your personal savings allowance for the year. When you receive your interest from NS&I, they won't have deducted the tax you may owe. However, they will send you statements every year outlining the tax you've earned and your balance. It's then up to you to pay the appropriate tax beyond your personal savings allowance.
Basic rate tax payers can earn up to £1,000 per year in savings interest without having to pay tax on it. Higher rate taxpayers can earn up to £500 per year tax free, and additional rate tax payers don't get a personal savings allowance at all. Find out how personal savings allowance works and how to boost it by £5,000 in our article on the topic.
If you like the sound of NS&I and want to earn money tax free, you could look into Premium Bonds instead. Buying Premium Bonds allows you to earn tax-free cash prizes ranging between £25 to £1,000,000 every month. Check out our article on the topic to find out if premium bonds are worth it.
How do the British Savings Bonds compare to similar products on the market?
With the British Savings Bonds paying interest of 4.15% AER, there are better fixed-term savings rates available in the market right now. For example, at the time of writing, the best interest rates on fixed-rate 3-year bonds range between 4.63% and 4.75%. Zenith, for instance, offers a 3 year fixed term deposit bond with an interest rate of 4.67% AER and a minimum opening balance of £1,000.
In the current environment, the longer you lock your money the lower the interest rate you can expect, however even some four and five-year fixed term bonds offer better interest rates than the British Savings Bond. One example is HTB which currently has a 5 Year Bond offering a 4.54% interest rate with a minimum opening balance of just £1. Products are pulled all the time, so while these interest rates are accurate at the time of writing, the deals might not be around for long.
The British Savings Bonds might still appeal to savers who want to ensure larger deposits are secure and aren't happy with the FSCS limits. But if you're looking to get the best interest rate possible, check out our best buy tables for the best fixed-rate bonds. We update our tables frequently so it's worth bookmarking these pages and checking back often for the best rates on the market.
