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? There are legitimate ways to reduce or even avoid tax on your savings. In this guide, we’ll explain how to avoid tax on savings in the UK and help you understand when you might be at risk of paying more than you need to.
3 allowances that may affect whether you’re liable for tax on your savings
How much tax (if any) you’ll pay on your savings interest depends on your overall income, including your salary, pension, or other earnings. Fortunately, the UK tax system includes several allowances that can help you legally reduce — or completely avoid — tax on your savings.
First, if your total income (including any savings interest) falls below the Personal Allowance — which is £12,570 for the 2025/26 tax year — then no tax will be due. This means many people with lower incomes may already meet the criteria for how to avoid tax on savings.
Second, most savers benefit from the Personal Savings Allowance (PSA), which lets you earn a certain amount of interest tax-free. The amount you’re entitled to depends on your income tax band:
- Basic-rate taxpayers can earn up to £1,000 in interest before paying tax
- Higher-rate taxpayers can earn up to £500
- Additional-rate taxpayers do not receive a PSA
Finally, if your total income is less than £17,570 in the 2025/26 tax year, you may qualify for the starting rate for savings, which gives you up to £5,000 of additional tax-free interest.
2 million people are expected to pay tax on cash savings for the 2024/25 tax year
A mix of frozen tax thresholds and rising interest rates means more savers than ever are being pulled into paying tax on their interest.
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.
And it’s not just high earners who are affected. The number of basic-rate taxpayers now paying tax on savings has more than doubled during that time — showing how even modest savers are getting caught out.
If you already complete a Self Assessment tax return, you’ll be asked to declare any interest you’ve earned. But even if you’re normally taxed through PAYE, your bank or building society still reports your interest to HMRC.
In many cases, savers don’t realise they owe tax until they receive a letter or notice a change in their tax code — which can reduce your take-home pay. That’s why it’s more important than ever to understand how to avoid tax on savings and make sure you’re using all available allowances.
How to manage your savings to reduce a tax bill
If you’re looking for how to avoid tax on savings, one of the first steps is keeping an eye on how much interest you’re earning. Once you begin approaching your tax-free allowance thresholds, it’s important to act early. The following five strategies could help you avoid an unexpected bill.
1. Save money in an ISA
One of the most straightforward ways to avoid tax on savings is by using an ISA (Individual Savings Account). Any interest earned on money held in a Cash ISA is completely tax-free — regardless of your income level.
If you’re getting close to the point where your interest might be taxed, transferring some of your money into an ISA could be a smart move.
Cash ISAs function much like regular savings accounts but with the added benefit of tax-free interest. Just be aware that there is an annual ISA allowance — currently £20,000 for the 2025/26 tax year. If your savings exceed this, you could gradually move money into an ISA each year as your allowance resets.
2. Buy Premium Bonds
If you’re exploring how to avoid tax on savings, Premium Bonds offer a unique, tax-free alternative — though they work differently from traditional savings accounts.
Instead of earning interest, your money is entered into a monthly prize draw. If you win, the prizes — ranging from £25 to £1 million — are completely tax-free. The odds currently stand at 22,000 to 1 for each £1 you hold, each month.
That said, Premium Bonds don’t offer guaranteed returns, so they may not be ideal if you’re looking for regular income or predictable growth. However, they can be a good way to shelter up to £50,000 from tax, with the flexibility to withdraw your money at any time.
3. Increase your pension contributions
If you’re holding a significant amount in cash and looking for ways to avoid tax on savings, one option to consider is boosting your pension contributions — which can be one of the most tax-efficient ways to save for the future.
Pensions are typically invested with long-term growth in mind, and any returns generated within your pension are not subject to tax. Plus, pension contributions usually benefit from generous tax relief. As long as you stay within the Annual Allowance (currently £60,000 in 2025/26), you’ll receive relief at your highest rate of Income Tax. For example, a basic-rate taxpayer contributing £80 would see the government top it up to £100.
It’s worth noting that the maximum you can contribute and still receive tax relief is 100% of your annual earnings. If you’re a high earner or have accessed your pension flexibly before, your Annual Allowance may be lower — so it’s wise to check or seek advice.
While pensions can be a powerful way to reduce your tax liability, keep in mind that the money is usually locked away until at least age 55 (rising to 57 from 2028). And although markets have historically delivered positive returns over time, this isn’t guaranteed — so your investments should always align with your goals and risk tolerance.
4. Invest your savings
Increasing your pension contributions isn’t the only way to make your savings work harder — investing is another option to consider.
One efficient route is to make use of your ISA allowance by investing through a Stocks and Shares ISA. This allows you to access a wide range of investments that can be tailored to your risk appetite and financial goals — all while ensuring any returns are completely tax-free.
It’s important to remember that investment values can go down as well as up, and returns are never guaranteed. However, by using a tax-efficient wrapper like an ISA or pension, you can protect your potential gains from unnecessary tax.
If you hold investments outside of these wrappers, you could face Capital Gains Tax or Dividend Tax. That’s why making investments part of a broader financial plan can help uncover smarter ways to reduce your tax liability and grow your wealth over time.
5. Place savings for a child in their own Junior ISA
If you’re saving money for a child, placing it in your own account might seem simpler — but it could also increase your tax bill. If you’re looking for how to avoid tax on savings that are intended for your children, a Junior ISA (JISA) could be a smarter option.
A JISA allows you to save or invest on behalf of a child, and any interest or investment growth is completely tax-free. This means the money can grow without affecting your own tax allowances.
While keeping the funds in your name gives you more control, it could push you over key tax thresholds. With a JISA, the money is in the child’s name and locked away until they turn 18, when they gain full access to use it as they choose — so it’s important to weigh up whether the long-term tax benefits outweigh the reduced control.
Get in touch to create a tailored plan that considers your tax liability
Finding smart, legitimate ways to avoid tax on savings can help you make the most of your money — but it’s just one part of a wider financial picture. By creating a plan that reflects your goals, income, and tax position, you can take greater control of your future. Here at Jordan FM, we are here to help.
Contact us today to discuss how we can help you build a tailored financial strategy that’s both tax-efficient and aligned with your long-term ambitions.
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.
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