What is tax-free saving?
Tax-free saving means you don’t pay any tax on the interest you earn.
There are two main ways to save tax-free in the UK:
- By keeping the interest on your savings within your tax-free allowances.
- Or by opening a tax-free savings account, such as an Individual Savings Account (ISA).
Tax on savings interest
Income Tax
When you earn money from interest on your savings, it counts as income and is subject to Income Tax rules.
Tax on interest is affected by how much you earn from your wages, pension or other sources of income.
Most people in the UK get a Personal Allowance of up to £12,570, which is the amount of income, including interest, that you don’t have to pay any tax on.
If you earn more than £100,000, after certain allowable deductions such as pension and gift aid contributions, your Personal Allowance goes down by £1 for every £2 you earn above that amount. This means your Personal Allowance would be reduced to zero if you earned £125,140 or more.
For those on lower incomes, the Starting rate for savings lets you get up to £5,000 of savings interest before paying tax. The more you earn from your other sources of income though, like wages or pension, the less your starting rate for savings will be. Every £1 earned over the £12,570 Personal Allowance reduces the £5,000 starting rate by £1 until it’s zero.
So the starting rate for savings won’t be relevant to you if your other income is £17,570 or more.
And your Personal Savings Allowance means you could earn up to £1,000 of interest tax-free, depending on which Income Tax band you’re in.
| Income Tax band | Personal Savings Allowance |
| Basic rate | £1,000 |
| Higher rate | £500 |
| Additional rate | £0 |
If you live in Scotland your Income Tax bands are different from those in the rest of the UK. However your Personal Savings Allowance is still based on the UK-wide rules.
Because Scottish Income Tax bands differ from those in the rest of the UK, it's worth checking which Personal Savings Allowance applies to you based on your overall income.
Income Tax in Scotland (gov.uk)
It’s also good to check how any of the other allowances mentioned here could affect how much tax you pay on your savings interest. To find out more, visit the gov.uk website.
Learn more about tax on savings interest (gov.uk)
Tax-free savings accounts
ISAs
An Individual Savings Account (ISA) is a type of savings account that lets you deposit up to £20,000 each tax year without paying Income Tax or Capital Gains Tax on the returns.
There are different types of ISAs, like Cash ISAs or Stocks and Shares ISAs, and you can split your £20,000 ISA allowance across multiple types.
However, the rules are changing from 6 April 2027, so read our article below to find out more.
Learn about ISAs and how they work
Find out more about ISA allowances
Premium Bonds
You can also save tax-free with Premium Bonds.
Instead of earning interest, each £1 Bond you hold is entered into a monthly prize draw, giving you the chance to win tax-free prizes ranging from £25 to £1 million.
You can invest from £25, up to the maximum holding of £50,000.
Living outside the UK
If you live outside the UK, or have dual citizenship, there may be other taxes that apply to your savings.
For example, you can’t open an ISA if you’re resident abroad and you might not qualify for certain kinds of UK tax relief. Always check to see how your savings could be affected.
Learn about tax on income if you live outside the UK (gov.uk)
Check what works for you
Understanding your saving allowances and choosing tax-free options such as ISAs or Premium Bonds could help you make more of your savings.
Before deciding where to put your money, always check the latest rules and consider if tax-free products could support your financial plans. It may also be helpful to take advice from a professional financial adviser or planner, depending on your circumstances.
For more information and guidance, visit moneyhelper.org.uk
