Financial experts explain how to avoid paying unnecessary tax on savings using ISAs and personal allowances
A money guru has revealed how Brits can dodge needless tax bills on their savings – highlighting a crucial £20,000 threshold. Matthew Jenkin from consumer champion Which? warned that savers risk getting stung by tax on interest earnings.
Looking ahead to what people should be mindful of in the new year, he sounded the alarm about ‘unnecessary tax’. He said: “There is a limit to how much interest you can earn on your money before you face a tax bill. Basic-rate taxpayers can currently earn up to £1,000 in interest tax-free, higher-rate taxpayers £500, and additional-rate taxpayers get no allowance.
“So if you have a large sum to reinvest, opening a cash ISA can currently help you shield up to £20,000 a year from the claws of HMRC. From 2027, however, the amount you can hold in cash will fall to £12,000 for savers under 65. To use the full £20,000 ISA allowance, the remaining £8,000 would need to be invested in a stocks and shares ISA.”
Money-saving champion Martin Lewis recently highlighted that workers pulling in between £12,500 and £50,000 annually could breach the personal savings allowance threshold if they’ve got substantial nest eggs stashed away.
The financial expert was breaking down how to legally slash tax on savings using government-backed schemes. He emphasised that tax isn’t levied on the actual savings deposits, but instead on the interest they generate.
The problem is getting worse after Chancellor Rachel Reeves extended the income tax threshold freeze for a further three years in last November’s Budget.
For the 2025/26 tax year, the standard Personal Allowance – the sum you can pocket without paying a penny in tax – stands at £12,570. The basic rate of 20% applies to earnings between £12,571 and £50,270.
Meanwhile, the higher rate kicks in at 40% on income from £12,571 to £50,270, whilst anything above taxable income of £125,140 faces a whopping 45% charge. These thresholds have remained static since 2021 and are now set to stay put until 2031, dragging millions into higher tax brackets through so-called ‘fiscal drag’ as pay packets swell with inflation.
For taxpayers, he warned that interest earned from savings accounts could land you with a tax bill if it breaks through certain limits. He said: “Talking about those people who are generally paying tax, the most important thing to understand is you will probably have a personal savings allowance.
“This is a special amount of savings interest that you can earn each year, which isn’t taxed. Now if you’re a basic rate taxpayer, a 20% rate taxpayer, which is generally someone earning between about £12,500 and £50,000 a year, then your personal savings allowance is £1,000.”
This means savers can pocket £1,000 worth of interest from any legitimate UK sources without facing a tax bill. Lewis pointed out that with top easy access accounts currently paying around 5 per cent interest, you’d need approximately £20,000 stashed away to generate £1,000 in interest.
The money-saving expert Martin Lewis has shared crucial advice on how tax impacts savings interest. “So if you’ve got £20,000 or less in savings and you’re a basic rate taxpayer, it is very unlikely that your savings interest would be taxed, so you don’t have to pay anything so you can get on with it. If you’re a higher 40% rate taxpayer, which is someone earning over around £50,000 up to about £125,000, then your personal savings allowance is £500 a year.”
Mr Lewis explained that this effectively means £10,000 sitting in a leading easy access account would be subject to tax. Meanwhile, Mr Jenkin warned that people who deposit £10,000, for instance, into a high street instant access account could be losing out on hundreds of pounds.
He cautioned: “One of the biggest mistakes you can make when looking for the best home for your savings is limiting your search to the high street. The familiarity of a household name may feel safe, but breaking out of your comfort zone and choosing a smaller lesser-known provider could leave you better off.”
He pointed out that smaller online operators often provide much more appealing rates, and data from Moneyfacts reveals the gap in rates is most pronounced on instant-access products.
He also noted that the difference in interest could exceed £300 over a 12-month period for a sum of £10,000.
Mr Jenkin explained: “For example, if you invested £10,000 in a high street account paying 1.15% AER – the average high street rate – you could expect to earn £115 in interest over a year. But if that balance was invested in the top account for larger deposits you’d earn 4.48% AER and your annual interest income would increase to £448. That’s a difference of more than £300. If you’re nervous about saving with a bank or platform you’ve never heard of, there are some checks you can perform to ensure your money is protected.”
It’s crucial to check whether the bank or platform is covered by the Financial Services Compensation Scheme (FSCS), as it safeguards up to £120,000 of a saver’s pot if the institution goes under. Challenger banks must adhere to the same rules and regulations as other banks, but not all of them are FSCS-protected, he added.
To read the full Which? article click here.
