Merryn's Blog

The best way to cut your tax bill

NS&I index-linked certificates are an excellent way to get a handsome rate of interest without paying tax.

A few weeks ago we told you to put your name down for the NS&I notification service for index-linked certificates. If you did you've probably already applied. If you didn't, this is your notification.

The certificates have now opened to new business offering an interest rate of RPI plus 0.5%. You might think at first glance that this isn't all that good, given that you can get something similar-sounding at several high street banks.

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But there is a key difference: NS&I rates come tax free. So with RPI at 5.3% in March, that means everyone who had taken out the equivalent of a NS&I bond last March would now be getting a net rate of 5.8%.

If you are a basic rate tax payer you'd have to be earning a rate of 7.25% to get that elsewhere. If you are a 40% payer you'd have to be getting 9.67%, and if you are paying the UK's top rate of 50% in income tax you'd need at least 11.60%. That just isn't possible.

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So it isn't just inflation that makes these certificates a good deal, it's tax. Further good news comes in the fact that the certificates are linked to RPI, not CPI as some suspected the new tranche might be.

The only real risk here is that interest rates in the UK normalise. Usually, the base rate is a couple of percent higher than inflation and savings rates are a bit higher than that. So if we lived in normal times, base rates and savings rates would be knocking around 7%-8%.

This could happen over the next five years (only five year certificates are being released). Note that only this week Mervyn King said that "Bank Rate can't stay at this level indefinitely and I'm very happy to confirm that, and to say that at some point Bank Rate will undoubtedly need to return to more normal levels, but I don't think that tells you precisely which month, and that is something we look at month by month."

But even if things do somehow normalise, look at the numbers above and you will see that unless rates rise further than normal levels, most people will still be better off with NS&I. That's particularly the case for those earning over £150,000, paying a marginal tax rate of 50%.

You can put in a maximum of £15,000 via www.nsandi.com. Best get on with it.

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