Q&A: Why am I paying tax on my National Solidarity Bond?

Surely your articles over the past two weeks are incorrect or am I misunderstanding the details?

You say: “The savings products on offer through An Post are not just free of Dirt, they are also exempt from income tax, PRSI and US.”

My wife and I hold several tranches of four-year National Solidarity Bonds (issued by the NTMA and distributed via An Post) maturing August 2016, May 2017 and July 2017. Each year An Post sends us the interest, having deducted Dirt at 41 per cent.

Mr DMcC, Dublin

Happily, at least from my perspective, the articles are not incorrect but I can fully understand your confusion.

With interest rates in general being as low as they currently are, clearly State savings are an option worth considering. And one of their most attractive features – especially after the decision at the start of this month to sharply cut the interest rates on offer on State savings – is the fact that such investments are free of tax.

With banks forced to deduct Dirt at 41 per cent on already low savings rates, it is difficult for them to compete with An Post on savings, which in large part explains why State savings interest rates were cut again on June 5th. As you rightly point out, An Post markets State savings, including National Solidarity Bonds, the management of them is the responsibility of the National treasury Management Agency (NTMA) which is responsible for managing the debt and borrowing needs of the Irish State.

Following that cut in interest rates, the NTMA is now marketing the sixth issue of the four-year National Solidarity Bonds. And, on the issue of tax, what it says specifically is: “The bonus is not subject to Deposit Interest Retention Tax (Dirt), and is exempt from income tax, pay related social insurance (PRSI) and the universal social charge (USC). National Solidarity Bonds (4 Years) in Issue 6 are exempt from capital gains tax in Ireland.”

Bonus is the term now used for interest on these products. If you hold the sixth issue of the four-year National Solidarity Bond to maturity on or after June 2020, you will get a “bonus” of 2 per cent.

If you need to cash them in early, the growth on your investment is as follows: 0.05 per cent after one year, 0.55 per cent after two years and 0.9 per cent after three years. These figures are all referred to as a “bonus” by the NTMA though clearly, they are interest payments.

Roughly the same wording applies to other State savings – such as An Post Savings certificates and three-year savings bonds – though with the savings certs, the term “interest” is used.

So the position is clear, there is no Dirt due on the interest/bonus accruing on NTMA savings. In addition, there is no liability to income tax, the universal social charge or to PRSI. And finally, the gain does not constitute a capital gain for tax purposes.

However if you go back to the earlier issues of the National Solidarity Bond – Issues 1-3 – which were marketed up to December 2013, the annual interest or bonus was liable to Dirt, and also PRSI for many people.

The bonds you hold mature between August this year and July next year. That means you will have acquired them between August 2012 and July 2013. As they were bought before the fourth issue was announced in December 2013, you are liable to Dirt (and possibly PRSI).

Investment income and eligibility for Medical Card

Do you know the rate of interest which the Department of Social Welfare uses in calculating income from investments for medical card eligibility

Mr AO'C, email

It is really important to get an accurate sense of your financial assets when you are considering applying for means-tested benefits from the Department of Social Protection or something like the medical card. However, in the latter instance, it is the Health Services Executive (HSE) which is responsible for assessing means and setting a “notional” interest rate for the return on investments.

The most important thing to note, of course, is that the HSE allows a certain amount of savings before it targets them in the means test.

The first €36,000 of saving s for a single person, and the first €72,000 for a couple are disregarded.

Thereafter, the HSE applies a “notional” rate of interest and it assumes that this is the level of income that you derive from your savings and investments. At the moment that rate is 1.323 per cent per annum.

The rate is reviewed quarterly and was last done earlier this year.

Of course, it is always possible for you to present evidence of the actual rate of interest on your investments. If you provide a certificate of interest paid on savings in the last full calendar year, that is the rate the HSE will apply.

There is also the option in relation to long-term or fixed-term savings to ask the HSE to take account of interest only when the savings mature and interest is actually paid.

It’s worth remembering that the gross amount of interest paid is the figure considered by the HSE when assessing eligibility for a medical card.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or email dcoyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice