Premium Bonds savers reminded of £25,000 tax rule that 'many people forget'

Premium Bonds savers have been urged to read up on a key tax rule that could impact their savings. A major perk of the savings scheme is all your winnings are tax-free, even for large amounts such as £50,000, £100,000, or a £1million jackpot prize. Yet you could soon land a tax bill depending on how you use the funds.

Finance experts at Octopus Money found have reminded savers to be aware of their tax allowances or they could end up with a surprise bill from HMRC. Tom Francis, head of personal finance, said: "Where tax could come into play is if you move your winnings into a savings account and start earning interest.

"Many people forget about their personal savings allowance - the amount of interest you can earn each year tax-free." Those on the basic rate for income tax can earn up to £1,000 in interest over a year with no tax to pay.

The allowance decreases to £500 for higher rate taxpayers while additional rate taxpayers get no allowance, meaning they pay tax on all their savings growth.

Mr Francis said: "Keeping maths nice and simple, if you're a basic rate taxpayer with a savings account paying 4% interest, you could hold around £25,000 in savings before you'd start paying tax on the interest.

"Unless you've already maxed out your allowance, Premium Bond winnings won't trigger a tax bill." If you had £25,000 in savings, this would earn £1,000 a year in interest, using up all your savings allowance.

Any interest earnings above this amount would be taxed at 20 percent. However, you can build up your savings while avoiding a tax bill if you put your Premium Bonds winnings into ISAs.

'Your money is protected'

These accounts are entirely tax-free, with no tax to pay on any interest earnings or investment growth within an ISA product. Mr Francis said: "For security, a cash ISA is a great starting point: your money's protected, you'll earn interest, and right now many accounts are paying around 4 percent or more, with higher rates available on fixed-term deals.

"If you're happy to take a bit more risk for the potential of stronger long-term growth, a stocks and shares ISA allows you to invest up to £20,000 a year tax-free - giving your winnings a real chance of outpacing inflation."

The prize fund rate for Premium Bonds recently fell from 3.8 percent down to the current 3.6 percent. The odds of each £1 Bond winning stayed the same at 22,000 to one.