Tax-free savings accounts and tax-efficient investment options in the UK

Tax-free savings accounts such as ISAs can be an option if you’re a high earner and aren’t eligible for the personal savings allowance, or if you expect to earn interest that will exceed your yearly personal savings allowance (PSA). 

On this page, you’ll learn what a tax-free savings account is, how tax-free savings work, and who’s eligible. We’ll also provide an overview of your allowances for tax-free savings interest, including the starting savings rate, plus the pros and cons of tax-free savings accounts.

In the UK, you can earn a certain amount of tax-free interest on your savings depending on your income and tax band:

• If you earn below £17,570 per year, you could get up to £5,000 of tax-free interest through the starting rate for savings. For £1 of income you receive above your Personal Allowance of £12,570, your starting rate for savings will be reduced by £1. 

• If you are a basic rate taxpayer, you will usually have a PSA of £1,000, meaning you won’t pay tax on savings interest up to this amount. If you are a basic rate taxpayer earning less than £17,570 per year, you can also benefit from the starting rate for savings. 
• If you are a higher rate taxpayer, you will usually have a PSA of £500, meaning you won’t pay tax on savings interest up to this amount.

If you are an additional rate taxpayer, you don’t have a PSA for earning tax-free interest on your savings. 

In addition, you can use tax-free savings and investment accounts like Individual Savings Accounts (ISAs) to shield more of your savings from tax. 

A tax-free savings account lets you earn interest without paying tax on it. There are typically restrictions on this type of account, such as annual contribution limits. Cash ISAs are a type of account specifically designed for tax-free saving.

A tax-free investment account is a vehicle for investing your money while shielding it from tax. The most common type is a stocks and shares ISA, where you can invest up to your £20,000 annual allowance without paying income tax or capital gains tax on the returns.

ISAs are a type of tax-free savings account that most adults in the UK can apply for. With an ISA, you can save up to a maximum of £20,000 tax free each tax year (normally 6th April to 5th April), and you can choose from a few different types of ISA to help meet your savings goals:

• Cash ISA. A cash ISA lets you save up to £20,000 a year without paying tax on the interest you earn. This allowance will reduce to £12,000 for those under 65 in the 2027/28 tax year, though you can still invest up to  £8,000 in a stocks and shares ISA (effectively acting as the ‘remainder’ of the previous £20,000 allowance). 
• Lifetime ISA. You can open a Lifetime ISA (LISA) and hold cash in your account, contributing up to £4,000 a year which also counts towards your £20,000 allowance. LISAs are designed for retirement savings, or for saving towards your first home, and the government will add a 25% bonus to your contributions. 
• Junior ISA. If you’re the parent or guardian of someone under the age of 18, you can set up a Junior ISA and save up to £9,000 a year into it. Your child will be able to access the funds on their 18th birthday.
• Help to Buy ISA. The Help to Buy ISA is now closed to new applicants, but if you already have one, you can continue contributing to save towards your first home tax-free.  

If you are saving tax-free using your PSA or the starting savings rate, you can choose to put your money into any type of savings account:

• Fixed rate bonds. If you’re happy to lock your money away for a fixed term in exchange for a set interest rate that’s usually more competitive, a fixed rate bond might suit you. 
• Easy access savings accounts. You can top up your account and withdraw funds whenever you like, making this the most flexible type of savings account.
• Notice accounts. Your funds can be withdrawn after a set notice period, usually of up to 125 days. This can secure you a more competitive interest rate than you might get on an easy access account. 

When looking to invest your money in a tax-free environment, you have several options:

• Stocks and shares ISA: This type of account allows you to invest in equities, funds, and bonds. Any potential capital growth or dividends you receive are shielded from tax. Please note that with investing, your capital is at risk and you may get back less than you put in.
• Innovative Finance ISA (IFISA): You can use your annual tax-free allowance for peer-to-peer lending and debt-based crowdfunding. Note that these are higher-risk investments and are typically not protected by the Financial Services Compensation Scheme (FSCS).
• Lifetime ISA (LISA): You can open a LISA and hold stocks and shares in your account to contribute towards your first home or retirement. As with a cash LISA, there’s a government bonus on your contributions. 
• Junior ISA (JISA): You also have the option of creating a tax-free investment portfolio for a child's future, which will be securely held until they turn 18.
• NS&I Premium Bonds: Issued by National Savings and Investments, your money buys bonds that are entered into a monthly prize draw instead of earning a standard interest rate. Any prizes you win are completely tax-free.
• UK Government Gilts: Gilts are bonds issued by the UK government to finance its spending. While the regular interest payments you receive are subject to income tax, any profit you make from selling the gilt or holding it to maturity is entirely exempt from capital gains tax.

Yes, ISAs provide a tax-free wrapper so you don’t have to pay income or capital gains tax on money generated from your interest or investments. 

When opening and managing your account, keep these core rules in mind:

• ISAs are 100% tax-free: Any interest on cash, or capital gains from investments within the account, remains completely free from UK tax.
• You have a limit of £20,000 per year: You can split this limit across different types of ISAs, as long as your total contributions do not exceed this annual threshold. If you do not use your full allowance before the tax year ends on 5th April, you cannot carry the unused amount over to the next year.
• You must meet the eligibility criteria: To open an adult ISA, you must be aged 18 or over and a resident in the UK. Different accounts will have varying eligibility criteria, so always check terms and conditions before opening one. 

The main benefit of a tax-free savings account is, of course, that you won’t pay tax on the interest you earn. Depending on the account type (such as an easy access ISA), you can make withdrawals without penalties, but fixed-term ISAs typically charge a fee for early access. 

However, tax-free savings accounts in the UK typically offer less competitive interest rates than traditional savings accounts, and you could utilise your PSA to earn money from your savings without having to pay tax. The main exceptions to this are if you’re an additional rate taxpayer (you won’t be eligible for the PSA) or you have a substantial amount of savings that means you’ll earn enough interest to exceed your PSA.

It’s important to compare all the different types of savings accounts you’re eligible for, so you find the one that’s right for you and suits your savings goals.

The alternatives to tax-free savings accounts are traditional savings accounts, or general investment accounts. The most appropriate option for you will depend on your individual goals, and how much tax you might incur on your savings and investments. Here are some illustrative examples you can apply to your own situation to work out whether you would owe any tax, and what this might mean for your savings or investments. 

Example 1: Imagine you’re a basic rate taxpayer, and have earned £800 in interest. Your PSA is £1,000, so this falls within your allowance, meaning you won’t owe any tax and can keep your savings in any type of account you like. 

Savings accounts often offer higher interest rates than ISAs, so it can be worth exploring these options if you won’t earn more than your PSA. 

• Explore interest rates for savings accounts

Example 2: Imagine you sell investments in your general investment account. Everyone has a tax-free allowance, which is £3,000 for the 2026/2027 tax year. If your investment profit is £2,500, you will not pay capital gains tax on this transaction. 

Example 3: Imagine you hold shares within a stocks and shares ISA. You receive £600 in dividends; if your investments were in a general investment account, you would owe tax, as you have an annual dividend allowance of £500. However, with your investments in an ISA instead, you won’t owe any tax. 

Here is how different savings balances might impact your tax position, assuming an illustrative 5.00% AER in a traditional savings account, for a basic or higher-rate taxpayer:

• Saving £1,000: At a 5.00% rate, you would earn £50 in interest over the year. This is well below the Personal Savings Allowance for a basic or higher rate taxpayer, so no tax is due. 
• Saving £5,000: This balance would generate £250 in interest. You still will not owe any tax, as the interest remains fully covered by your allowance.
• Saving £10,000: Earning 5.00% on this amount provides £500 in interest. This takes up half of your tax-free allowance if you are a basic rate taxpayer. If you are a higher-rate taxpayer, this accounts for the whole of your allowance, so if you have any other savings, the interest on them would be taxed at 40% unless saved in an ISA. 
• Saving £20,000: This balance produces exactly £1,000 in interest, entirely using up your allowance as a basic rate taxpayer and exceeding it by £500 as a higher-rate taxpayer. With this amount, you may want to consider the tax implications and potentially move money into a tax-free environment. 

Note that if you are an additional rate taxpayer, you incur tax on any interest so may want to consider saving in a tax-free environment regardless of how much interest you expect to earn. 

Diversifying your savings across different account types helps balance accessibility with potential growth while managing tax efficiency. 

If you are looking to earn more interest before hitting your Personal Savings Allowance tax thresholds, you can choose from a range of competitive savings accounts from our partner banks. Simply register for a Raisin UK Account to quickly and easily apply for free.