Tax free status....Premium Bonds and ISA's

alphonso49uk

Ive been thinking about this for the last couple of weeks but cant seem to find a definitive answer so here goes.

Premium Bond prizes are tax free at source. Similarly with ISAs.

However if Premium Bond prizes go into my bank account, do they then automatically become part of my taxable income. I know that the first £1000 of savings income isnt taxed.

So...if I were to win a big prize...say 50k and it initially goes into my bank account, and the majority of it stays there, do HMRC know that the remainder should be ignored for tax purposes ad infinitum? I suspect this cant be the case but Im not sure how it works.

Im also assuming that once a cash ISA matures and it goes into my bank account that this will count for tax purposes.

If my assumption is correct then whats the point of believing that these products and income arising from them is infact tax free?

masonic

It sounds like you fundamentally misunderstand taxation. Nobody gets taxed on money in their bank accounts, they get taxed on income. Premium Bond prizes are treated as proceeds of gambling, and gambling winnings are not taxed or treated as income. If you put that money into a bank account it is not treated as income just because you paid it in. If the bank account pays interest, then the interest is taxable as income because it wasn't part of the prize money you won. If instead you pay it into a cash ISA, any interest earned is exempt from tax. It doesn't become taxable when you withdraw it. So if you put the balance of your ISA into a savings account, no tax will become due on any of the balance. If, however, that balance earns interest, the interest would be taxable because it wasn't earned within the ISA.

ColdIron

alphonso49uk said:

However if Premium Bond prizes go into my bank account, do they then automatically become part of my taxable income

No

If you transferred some money from one account into another would it become taxable income? No

So...if I were to win a big prize...say 50k and it initially goes into my bank account, and the majority of it stays there, do HMRC know that the remainder should be ignored for tax purposes ad infinitum? I suspect this cant be the case but Im not sure how it works.

It isn't the case, see above

Im also assuming that once a cash ISA matures and it goes into my bank account that this will count for tax purposes.

No again

If my assumption is correct then whats the point of believing that these products and income arising from them is infact tax free?

Your assumption is incorrect

Ayr_Rage

The PB prize is not subject to tax.

Once you receive it and put it in an interest bearing account then that interest is counted as income.

Once funds are removed from an ISA then, once again, any income from shares or interest becomes normal income.

Any ISA income and PB wins ARE tax free until they are invested elsewhere !

amanda1024

You’re not taxed on money that sits in your account - you could keep the £50k there for years and HMRC wouldn’t even know about it.

Tax is only applied to income not to capital, which includes interest on savings which are outside one of these tax free wrappers. I.e.:
- If you have £20k in premium bonds and win £1k in prizes in a year, you keep the whole £1k
- If you have £20k in an ISA and get £1k in interest, whether you have this interest paid back into the ISA or out into your bank account, you keep the whole £1k. Generally the advice is to keep the £20k within the ISA wrapper when it matures so you can build up a larger ISA balance over time (by opening a new ISA and following the ISA transfer process)
- If you have £20k in a non-ISA savings account and get £1k in interest, you’ll potentially have to pay tax on this - anywhere between £0 and £450, depending on which tax band you’re in and whether you have other savings interest

So there’s definitely an advantage to the ISA or premium bond in that for a lot of people they’ll pay less tax on a similar level of return (to keep the numbers easy I’ve assumed a 5% return for all three).

If the concern is about what happens to interest due on the interest: there’s generally an option to have the interest paid within the wrapper, whether that’s using premium bond prizes to buy new bonds (up to the limit), or having ISA interest paid within the ISA. 

Dazed_and_C0nfused

I know that the first £1000 of savings income isnt taxed

Assuming you are referring to the savings nil rate band (aka Personal Savings Allowance) then that income is taxed, but at a 0% tax rate.

Makes no difference to most people but it does for some, mainly those subject to HICBC and tapered Personal Allowance.

t0rt0ise

Also when ISAs mature they don't automatically go into your bank acvount. They stay as an ISA unless you decide to withdraw the money.

dunstonh

And don't assume that being tax free is better than paying tax.   Pensions are better than ISAs. despite some tax being payable on draws.

poseidon1

dunstonh said:

And don't assume that being tax free is better than paying tax.   Pensions are better than ISAs. despite some tax being payable on draws.

Not sure I agree this as general statement for all circumstances. I have an untouched Sipp which eventually will be accessed via  a series of UFPLS over the coming years of retirement. State pension  having now  come on stream together with rent and portfolio income, will now put me in  40% tax bracket, so any Sipp lump sums ( less 25% tax free) will automatically be subject to 40%.

For this reason I have been fully funding ISAs each year with bias towards high income investments, aim being to transition my entire taxable investment portfolio into non taxable isa. I could still add to my Sipp ( as a non earner  - £2,880 annually ) but not withstanding the 40% tax relief thereon, seems pointless given the 40% tax bill  on getting the cash out again. Do you agree?

ColdIron

poseidon1 said:

dunstonh said:

And don't assume that being tax free is better than paying tax.   Pensions are better than ISAs. despite some tax being payable on draws.

but not withstanding the 40% tax relief thereon, seems pointless given the 40% tax bill  on getting the cash out again. Do you agree?

You will only be taxed 40% on 3/4 of the cash, the other 1/4 is tax free. You will be 16.66% better off

alphonso49uk

Thanks for your replies.....I understand it better now