HMRC spells out tax status of Premium Bonds prizes in update

HMRC has provided an update for Premium Bonds savers wondering if their winnings could attract a tax bill. An individual contacted the tax authority as they were handling a person's estate.

They asked over social media: "Premium Bond wins received during administration period of an estate of over £500 - are they due capital gains tax for a simple estate return?" Premium Bonds prizes range from £25 up to £1 million, with other large prizes including for £100,000 and £50,000.

HMRC had a simple answer for the individual: "Premium Bond wins are tax free in the UK and so do not need to be declared." Guidance on the NS&I website : "All prizes are tax-free."

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The tax-exempt nature of Premium Bonds makes them a particularly attractive savings choice if you have already used up your tax-free savings allowances. A person on the basic rate for income tax can earn up to £1,000 a year in interest on their savings without paying tax.

You can also build up your savings tax-free by depositing into ISAs, with no tax to pay on any interest or investment growth within an ISA wrapped. You can put away up to £20,000 a year into ISAs, and this allowance can be divided among different types of ISAs such as cash ISAs or stocks and shares ISAs.

NS&I increased the rates on several of its British Savings Bonds this week in a bid to attract new customers. This has prompted speculation about whether or not the prize fund rate for Premium Bonds could be altered as well.

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The rate dropped from the April draw, falling from 4% to 3.8%, following two rate drops in December and January. Sarah Coles, head of personal finance at , thinks it's more likely to drop in the coming months.

She explained her reasoning, saying: "The easy access market is holding steady right now, but rates are not on their way up, so there’s no pressure for Premium Bond rates to rise. NS&I has been tasked with rising slightly more money in the current financial year, but not significantly more, so this is unlikely to drive a hike either.

"An awful lot will depend on the direction of inflation and interest rates, but if we get the rate cuts the market is expecting, the next move for Premium Bonds may well be a cut rather than a rise." In contrast, Matthew Parden, CEO and co-founder of savings provider , is more optimistic about a rates rise.

He said: "NS&I has a history of adjusting the prize fund rate in response to market demand and funding requirements. If these newly improved guaranteed-rate products start to divert savers’ attention away from Premium Bonds, it wouldn’t be surprising to see the prize rate rise later this year to retain their appeal."