Fixed-Rate Bonds UK: The Two-Year Lock-In Has a Price

The NS&I Guaranteed Growth Bond terms list 4.99% AER for one year, 5.07% for two, 5.10% for three and 5.17% for five, with a £500 minimum per bond. Interest is added on each anniversary, but for Growth Bonds NS&I says it is taxable in the tax year the bond matures. You cannot withdraw during the term or add to an existing bond. NS&I offers a 30-day cancellation window after confirmation; that is not ongoing access.

This is a verified provider illustration, not a claim to have found the market's best bond. A higher headline from another bank does not settle the choice until you check deposit minimum, withdrawal rules, interest timing and its authorised banking licence. Use the savings hub to compare account types, not an old 'best buy' screenshot.

Put £20,000 into each route today and compare balances after exactly two years, with no withdrawals, fees or tax in the first pass. NS&I's two-year Growth Bond at 5.07% AER would finish at £22,079.41. Fix for one year at 4.99%, then hypothetically renew at the same rate: £22,045.80. The gap is just £33.61 across the whole £20,000, not a guaranteed annual advantage: the second-year offer is unknown.

The one-year bond ends year one at £20,998. To match the two-year bond by year two, the renewal must pay 5.15% AER for the second year (£22,079.41 ÷ £20,998 − 1). Below that, the two-year bond wins on gross interest; above it, the one-year route wins. You cannot lock in that renewal rate today.

Leave the same £20,000 in NS&I Direct Saver at its current 3.75% unchanged for both years, and it would finish at £21,528.13. That is a scenario, not a rate forecast: its rate is variable. If year one stayed at 3.75%, year two would have to average 6.41% to match the fixed two-year outcome. Conversely, variable cash lets you withdraw for a house deposit or emergency without breaking a bond. This is why the emergency-cash framework matters before chasing basis points.

HMRC aggregates savings interest across accounts, and the tax calculation depends on your other income and unused allowances. For a concrete higher-rate example, assume the saver is taxed at 40% on savings interest (see HMRC's 2026/27 bands), has £500 of Personal Savings Allowance remaining in each relevant tax year, has no other untaxed savings interest, and rates and tax treatment stay unchanged. That £500 is an assumption about this person's remaining allowance, not an entitlement for everyone.

The two-year NS&I Growth Bond's £2,079.41 interest is taxable on maturity: (£2,079.41 − £500) × 40% = £631.76 tax, leaving £1,447.65 interest after tax. The variable Direct Saver at an unchanged 3.75% yields £750 in year one and £778.13 in year two; subtracting £500 of remaining allowance in each year gives tax of £100.00 + £111.25 = £211.25, leaving about £1,316.88 after tax. This comparison assumes the two years of Direct Saver interest land in different tax years, and the Growth Bond maturity interest lands in one; timing depends on the actual opening date and product terms. If your other interest has used the allowance or your tax band changes, recalculate. Do not treat gross AER as a net yield.

A cash ISA shelters interest from tax, subject to the £20,000 annual subscription limit and your remaining headroom. Compare an actual ISA offer on the same dates and balance before moving money: there is no universal 'ISA first' rule if the tax benefit is nil and the ISA pays less. See the cash ISA guide for the wrapper's trade-offs.

Do not confuse a savings bond with a traded gilt. This NS&I bond holds cash at a fixed rate until maturity; the gilt buying guide explains why selling a gilt early can crystallise a capital loss. NS&I products are backed by HM Treasury rather than the usual bank-deposit compensation scheme. For an alternative bank or building society, the FSCS deposit limit is £120,000 per eligible person per authorised bank, including other brands sharing the same licence; count accrued interest when deciding how much to place. Check the provider's licence and eligibility, not its marketing name.

If you may need cash before the two-year maturity, retain it in easy access rather than treating NS&I's cancellation period as an emergency fund. A one-year bond creates an earlier decision point; it does not guarantee that a favourable replacement offer will exist. Before applying, confirm the live issue number, minimum deposit, maturity instructions and how its interest is taxed. The savings accounts guide is a good starting point for matching the product to your withdrawal date.