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Guaranteed Income Bonds (GIBs)

What are they?

Guaranteed Income Bonds (GIBs) are similar in many ways to a fixed rate savings account. You receive a fixed rate of income for a fixed period of time, typically between one and five years. However, there is a fundamental difference; they are offered by insurance companies and not banks and building societies, which impacts on the way they're taxed.

Income is paid net of basic rate tax. This cannot be reclaimed by non-taxpayers, making GIBs a non-starter for them. However, higher rate taxpayers may enjoy a small tax benefit so, depending on the rates offered, GIBs can be worth a look as an alternative to a conventional fixed rate savings account.


How much can I save?

GIBs usually have a minimum savings level of £5,000 and a maximum of around £1 million. They are available to those aged 18 and over.


How safe is my money?

The Financial Services Compensation Scheme (FSCS) covers 100% of the first £50,000 of a GIB investment, per person.


What types are there?

Guaranteed Income BondsGuaranteed Growth Bonds

Pay regular income, typically monthly, quarterly or annually.


How does the tax work?

GIBs are a form of 'Investment Bond', which generally covers most lump-sum investments offered by insurance companies. Insurance companies must pay basic rate tax on both income and gains within their investment bond funds, hence all returns are paid net of basic rate tax.

  • Non-taxpayers cannot reclaim the tax that has been deducted, making Investment Bonds (including GIBs) a waste of time from their point of view.

  • Basic rate taxpayers have no further tax to pay (because basic rate tax has already been deducted), so Investment Bonds are neutral to them

  • Higher rate taxpayers must pay the difference between basic and higher rate tax, currently 20%, on both income and gains from Investment Bonds. There is a small tax benefit here compared to a conventional savings account, thanks to the maths of how tax is deducted.

  • Top rate taxpayers must pay the difference between basic and the top rate of tax, currently 25%, on both income and gains from Investment Bonds. Again, this means a small tax benefit compared to a conventional savings account, thanks to the maths of how tax is deducted.

Candid Example

For GIBs the extra tax is taken from the income that has already been taxed at basic rate. For example, a GIB of £10,000 paying 5% net will provide annual income of £500. A higher rate taxpayer must pay a further 20% of tax, an after tax income of £400.

In a savings account the income must be 'grossed up' as if no tax had been deducted before higher rate tax is taken. So, if an account of £10,000 pays 5% net, the income of £500 must be grossed up to £625. Higher rate tax of 40% is then deducted to leave an after tax income of £375.

However, that's not all, there's another fundamental difference in the way Investment Bonds are taxed.

You can withdraw up to 5% of your original investment each year without further tax to pay at that time. Any further tax on these withdrawals is instead owed when the Investment Bond matures or you decide to sell. For example, if a GIB is paying 5.5% then any further tax owed on the first 5% is deferred until maturity. The remaining 0.5% income is added to your other income for that tax year and further tax paid if it falls into the higher rate tax band.

See you how much you might have to pay on a maturing GIB using the Candid GIB Tax Calculator.

The tax owed at maturity or sale is calculated using a method called 'top-slicing'. This means higher rate taxpayers can defer and, in some circumstances, actually avoid having to pay extra higher rate tax on the 5% withdrawals.

Top-slicing is the calculation used to determine whether you owe any tax on maturity or sale of an Investment Bond, as follows:

  1. Take the amount received on the sale of the bond and add all previous withdrawals (including the 5% withdrawals).

  2. Subtract the total amount you've paid in plus the excess of any withdrawals over 5%, which gives your total 'profit'.

  3. Divide this profit by the number of complete years you've held the Investment Bond, to give a 'profit slice'.

  4. Add the profit slice to your taxable income for that year, any part of the slice that falls into the higher rate tax band is liable to extra tax (at the difference between basic and higher rate).

  5. Multiply the tax due on the profit slice by the number of complete years you've held the Investment Bond to get your total tax bill.

This benefits those who are higher rate taxpayers while they own a GIB except for the year of maturity, when their taxable income is sufficiently low that the profit slice doesn't push them into the higher rate band - perhaps because they've just retired.

Example

Mrs Rich, a higher rate taxpayer, invests £10,000 into a four year GIB paying 5.50%, giving an annual income of £550. The first £500 is treated as a 5% withdrawal while the remaining £50 is subject to extra tax of 20%, i.e. £10, in the year paid.

At maturity Mrs Rich receives £10,000. To calculate her tax liability she must first add all previous withdrawals (i.e. 4 x £550), giving a total £12,200.

Next she must subtract the initial £10,000 investment and the annual withdrawals in excess of 5% (i.e. 4 x £50), which leaves £2,000 (£12,200 - £10,000 - £200).

To get her profit slice Mrs Rich divides £2,000 by 4, the number of complete years she's held the GIB, to get £500.

As a higher rate taxpayer in the year of maturity her whole profit slice is taxable at 20%, equal to £100. This is multiplied by the number of complete years, 4, to get Mrs Rich's tax bill of £400.

If Mrs Rich were a basic rate taxpayer in the year of maturity and the profit slice pushed her taxable income into the higher rate band, then extra tax is payable on that part of the slice. If, say, half the slice fell into the higher rate band, then £250 of the £500 profit slice would be taxed and her overall tax equal to £200.

If Mrs Rich's taxable income in the year of maturity was such that the profit slice did not push her income into the higher tax band, then she'd have no tax to pay.

Age Allowance

If you're aged 65 or over GIBs can be both good and bad news regarding your increased age-related income tax personal allowance.

Good News Bad News
Any withdrawals within your 5% annual allowance don't affect your age allowance in the year they're taken. When the bond matures or is sold then the total gain (which includes all annual withdrawals up to 5%) is notionally added to your income that year, potentially reducing or wiping out your extra age allowance. While you might not have any additional tax to pay on profit, you could lose out due to a reduced/lost age allowance.

Can I withdraw my money?

GIB providers will usually penalise you for withdrawing your money before maturity. You might also incur a tax bill - see the top-slicing explanation above.


GIB Jargon

Here's some of the more common GIB jargon you might come across:

JargonMeaning
5% WithdrawalThe amount of your initial GIB investment that can be withdrawn each year with no tax liability at that time (it's calculated at maturity).
Top SlicingThe method by which the amount of tax owed, if any, is calculated when a GIB matures.