Diploma for Financial Advisers
Diploma in Accounting
Member of London Institute of Banking and Finance

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If you’re wondering how do I avoid paying tax on savings interest, you’re not alone. Many people in the UK want to make the most of their savings without losing a chunk to taxes. Thankfully, there are legal ways to reduce or completely avoid paying tax on the interest earned from your savings.

Use Your Personal Savings Allowance

The government gives most taxpayers a Personal Savings Allowance (PSA), which lets you earn a certain amount of interest without paying tax. If you’re a basic rate taxpayer, you can earn up to £1,000 in interest tax-free each year. Higher-rate taxpayers can earn up to £500 tax-free. However, additional-rate taxpayers don’t get a PSA.

Save in an ISA

An Individual Savings Account (ISA) is one of the easiest ways to avoid tax on your savings interest. Any interest you earn in a Cash ISA is completely tax-free. You can deposit up to £20,000 per year (2024 limit) into ISAs, and the interest doesn’t count toward your PSA.

Use Premium Bonds

Premium Bonds are a tax-free savings option provided by NS&I (National Savings and Investments). Instead of earning interest, your money goes into monthly prize draws where you can win tax-free prizes. While returns aren’t guaranteed, they’re completely tax-free if you win.

Keep Below the Starting Savings Rate

If your total income (excluding savings interest) is under £12,570 (the UK personal allowance), you could qualify for the starting savings rate of 0% tax on savings interest up to £5,000. This is ideal for low earners or retirees who rely mainly on savings.

Spread Savings Across Family Members

If you’re close to exceeding your PSA or personal allowance, you can transfer savings to a spouse or partner who has unused allowances. Married couples can take advantage of this to ensure all tax-free allowances are fully utilised.

Keep Track of Your Income

To avoid paying tax unnecessarily, regularly review how much interest your savings accounts are earning. If your income increases and pushes you into a higher tax bracket, consider switching to tax-free savings options like ISAs or Premium Bonds.

Conclusion

Learning how do I avoid paying tax on savings interest can save you money and help you grow your savings faster. By using ISAs, taking advantage of your PSA, and exploring other tax-free options, you can keep more of your hard-earned money. Take the time to plan your savings strategy, and you’ll enjoy greater financial peace of mind.

For personalised guidance, feel free to reach out for a session where we can optimise your savings strategy!

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