24% of people think all their savings are tax-free, according to a Lloyds Bank survey carried out in February 2025. However, they could be in for an unexpected shock, as the interest earned on savings might be liable for Income Tax.
The good news is, there are often ways to reduce a potential tax bill on your savings. Read on to find out when your savings might be taxed and how to avoid an unexpected bill.
3 allowances that may affect whether you’re liable for tax on your savings
How much you can earn in interest before tax might be due depends on your other income, such as your salary or pension.
First, if you add the interest to your other income and the total is below the Personal Allowance, which is £12,570 in the 2025/26 tax year, no tax will be due.
Second, most savers will benefit from the Personal Savings Allowance (PSA). You do not pay tax on interest that falls within this tax-free allowance. How much of the allowance you get depends on the rate of Income Tax you pay.
In 2025/26, before Income Tax is due on interest:
- Basic-rate taxpayers can earn up to £1,000
- Higher-rate taxpayers can earn up to £500.
If you’re an additional-rate taxpayer, you do not benefit from a PSA.
Finally, if your income is less than £17,570 in 2025/26, you may also benefit from an additional £5,000 allowance on your savings. This is known as the “starting rate for savings”.
2 million people are expected to pay tax on cash savings for the 2024/25 tax year
A combination of frozen tax thresholds and rising interest rates means more people will pay tax on their savings.
Indeed, according to AJ Bell figures released in February 2025, more than 2 million people will pay tax on cash savings for the 2024/25 tax year. The figure compares to just 650,000 in 2021/22.
It’s not just high earners who are affected. The number of basic-rate taxpayers who need to pay tax on savings has more than doubled in the same period.
If you already complete a self-assessment tax return, you will be asked to declare the interest you’ve received.
Banks and building societies send information to HMRC. So, if you’re usually taxed under PAYE, you might not be aware that any tax is due until you receive a letter. Usually, if tax is due, HMRC adjusts your tax code, which would affect your take-home pay.
How to manage your savings to reduce a tax bill
If you want to mitigate a potential bill on your savings, it’s important to keep track of how much interest you’re earning. Should you near the threshold for when you might start paying tax, these five options may help you avoid a bill.
1. Save money in an ISA
Interest earned on savings held in an ISA is tax-free. So, if you’re nearing the threshold for paying Income Tax on savings, moving some of your money to an ISA may be a logical step.
If you select a Cash ISA, your money will earn interest in the same way it would if you used a savings account.
You should note that the ISA allowance limits the amount you can place in an ISA in the 2025/26 tax year to £20,000. If your savings exceed this, you could slowly move your money into an ISA by making a new deposit each tax year, as your allowance will reset.
2. Buy Premium Bonds
The money held in Premium Bonds won’t earn interest. However, you’re entered into a prize draw each month and, if you win, the money is tax-free.
The prizes range in value from £25 to £1 million – there is a 22,000 to 1 chance of winning each month for every £1 you have in Premium Bonds.
As there’s no guarantee you’ll win through Premium Bonds, it may not be the right option if you want to generate a regular income or guaranteed returns.
You can hold between £25 and £50,000 in Premium Bonds, and you can withdraw your money at any time.
3. Increase your pension contributions
A pension provides a tax-efficient way to save for your retirement. So, if you’re holding a large sum in cash, you might want to consider boosting your pension contributions.
Your pension is normally invested with the aim of delivering long-term growth. The returns generated from investments held in a pension are not liable for tax.
In addition, your pension contributions will typically benefit from tax relief. Assuming your pension contributions don’t exceed the Annual Allowance (£60,000 in 2025/26), you’ll receive tax relief at the highest rate of Income Tax you pay. If you’re a basic-rate taxpayer, that means when you deposit £80, the government will add £20.
While the Annual Allowance is £60,000, the maximum tax relief you can claim is 100% of your annual earnings. If you’re a high earner or you have already taken a flexible income from your pension, your Annual Allowance may be lower. Please get in touch if you have any questions about your pension contributions.
Historically, investment markets have delivered returns over a long-term time frame, but this cannot be guaranteed. It’s important to ensure your pension investments are appropriate for you and your goals.
Keep in mind that money placed in your pension usually won’t be accessible until you turn 55 (rising to 57 in 2028).
4. Invest your savings
Boosting pension contributions isn’t the only way to invest your savings.
An efficient way to invest is to use your ISA annual allowance to place money into a Stocks and Shares ISA. Through a Stocks and Shares ISA, you may be able to invest in a range of assets that suit your risk profile and financial circumstances.
Again, remember that investment returns are not guaranteed, and the value of your investments may fall as well as rise.
Returns on investments that aren’t held in a tax-efficient wrapper, like a pension or ISA, could become liable for tax. Making investments part of your wider financial plan could identify ways to reduce a potential bill.
5. Place savings for a child in their own Junior ISA
If some of your savings are earmarked for a child, you might want to consider moving the money into their own Junior ISA (JISA).
There are benefits to holding the money intended for a child in your account, including having greater control over it. However, doing so could also increase your tax liability.
So, you may want to weigh up the pros and cons of opening a JISA in the child’s name. Keep in mind that you cannot usually access the money placed in a JISA until the child turns 18, at which point they can use it how they wish.
Get in touch to create a tailored plan that considers your tax liability
Reducing your tax liability in a way that aligns with your goals could help you get more out of your assets. Contact us to discuss how we could work with you to create a tailored financial plan that suits your needs.
Please note: This blog is for general information only and does not constitute financial advice, which should be based on your individual circumstances. The information is aimed at retail clients only.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate tax planning or NS&I products, including Premium Bonds.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
The favourable tax treatment of ISAs may be subject to changes in legislation in the future.
An investment in a Stocks & Shares ISA will not provide the same security of capital associated with a Cash ISA.
