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Tax on savings and investments: discover ways to save tax-free

If you're putting money away for the future, it's helpful to look at ways to make your money grow even more - either by building interest or by getting returns on investments.

But if you're making money on your savings, is the UK government going to ask you to pay tax? Not necessarily!

Do I need to pay tax on my savings?

Not everyone needs to pay tax on their savings.

If your savings are in a "tax-free" or "tax-exempt" account (see below for a list of accounts) then you don't need to pay income tax or capital gains tax when you withdraw your money, no matter how much interest or investment returns you make.

If your savings are in a different type of account, you still might not need to pay any tax, but this depends on how much interest/returns you make and how much income you have from your job.

That's because the UK government gives everyone a Personal Savings Allowance, which is the amount of money you can make from your savings that aren't in tax-free accounts (either in interest or investment returns) before you need to pay tax.

Whether or not you pay tax on your savings depends on:

  • how much interest or returns your savings make in a tax year (tax year runs April to April)
  • how much money you earn (and which income tax band this puts you in)
  • the type of account your money is in.

If your savings are only held in ISAs, or other tax-free savings/investment products, you won't need to pay any tax on money you make in interest or returns, no matter how much you make.

How much interest or investment returns can you make before paying tax (for each tax year)?

The table below only applies to interest/returns that you make on money held in an account that isn't tax-free.

Any interest/returns you make from money in a tax-exempt account, such as an ISA (Individual Savings Account), won't count towards your Personal Savings Allowance. The UK government limits how much money you can put in these types of accounts, but if you're saving around £20,000 a year or less, you could find that you don't need to use your Personal Savings Allowance at all.

Amount you earn Amount of interest or investment returns you can make before paying tax
Up to £12,570 £5,000
£12,571 to £50,270 £1,000
£50,271 to £125,140 £500
More than £125,140 £0

To make £1,000 in interest a year, you would need to have around £20,000 in a savings account with a 5% interest rate.

What savings and investment accounts are tax-free?

Cash ISAs

You can put up to £20,000 into a cash ISA every tax year (tax year runs April-April). Your money will earn interest, like a current account does.

Lots of companies offer cash ISAs that work just like normal savings accounts with instant access to your money, debit cards and online banking.

The downside is that cash ISAs often have low interest rates, meaning your money might not grow as quickly as it could do in a different type of account.

Stocks and shares ISAs

Just like with cash ISAs, you can put up to £20,000 into a stocks and shares ISA each tax year.

Your money won't earn interest, but instead it will be invested in the stock market on your behalf. It will be pooled with other people's money and used to buy assets like property and bonds. Your money grows as the value of those assets increases. The money you make is called "investment returns".

While there's more potential for your money to grow than it would if you relied on interest rates, stocks and shares ISAs can lose money if the value of the investments goes down so you could end up with less money then you paid in.

Junior ISAs

You can save up to £9,000 each tax year in a junior ISA on behalf of a child.

There are two types of junior ISA: cash and stocks and shares. Cash junior ISAs earn money by building interest, while stocks and shares junior ISAs invest in the stock market on your behalf.

Our Junior ISA invests in stocks and shares.

The child you opened the junior ISA for will be able to access the money when they turn 18. No matter how much the money you saved for them has grown, they won't need to pay any tax.

Lifetime ISAs

You can pay up to £4,000 into a lifetime ISA each tax year. This will count towards your overall yearly ISA limit (£20,000), so if you put £4,000 in a lifetime ISA, you can only put up to £16,000 in other ISAs.

You won't pay tax on any interest or returns you make with a lifetime ISA, in fact the government will also pay in an extra 25% on top of everything you save.

The catch is that you have to use the money in your lifetime ISA to buy your first home or leave it where it is until you turn 60 - if you break this rule you'll have to pay a hefty withdrawal charge.

Lifetime ISAs are also available as cash or stocks and shares. Cash lifetime ISAs make money by building interest, whereas stocks and shares lifetime ISAs invest in the stock market on your behalf.

Our Lifetime ISA invests in stocks and shares.

Hint: If you're thinking about opening a lifetime ISA to save for retirement, check if a pension could be a better option for you or something to consider opening as well as a lifetime ISA. You don't pay income tax on money you pay into a pension, but you might have to pay tax when you start receiving your pension.

Tax-exempt savings plans

Tax-exempt savings plans are only offered by friendly societies like us.

You can pay in up to £25 a month or £270 a year and you need to keep making this regular payment, without withdrawing any money, for at least 10 years to avoid paying tax on returns. So they are for people thinking long-term!

Tax-exempt savings plans are available for adults or children. You choose how long your money stays locked in for so they're good for saving for a specific date (such as a child's 21st birthday).

Our Family Bond and Junior Bond are tax-exempt savings plans that invest in stocks and shares.

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You may also be interested in:

Is it better to save or invest your money?

You can save money in a savings account, where it will grow with interest rates, or you can invest in an investment fund, which buys shares in the stock market.

How does the annual ISA allowance work?

Individual savings accounts (ISAs) allow UK residents to invest or save their money without paying tax on any money they make.

What is a “tax year” and does it affect you?

A tax year is simply the 12-month period that HMRC looks at to work out how much tax you should pay. In the UK, the tax year always runs from 6 April to 5 April the following year.

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