Tax-free savings accounts explained

Tax-free savings accounts, such as ISAs, can be a good option if you’re a high earner and aren’t eligible for the personal savings allowance, or if you have substantial savings. 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.

A tax-free savings account is a type of savings account that lets you earn interest on your savings without paying tax on the interest you earn. There are typically restrictions on this type of account, such as your annual income and how much money you can save each year (more on that below).

In the UK, tax-free savings accounts allow you to earn bank interest tax-free if your annual income and savings interest is less than £17,570 in total for the 2024/25 tax year.

In addition to dedicated tax-free savings accounts, you could also take advantage of a personal savings allowance (PSA) that allows you to earn up to certain amounts tax-free, depending on your income tax band.

ISAs, or individual savings accounts, are another type of tax-free savings account that anyone can apply for. With an ISA, you can save up to a maximum of £20,000 per tax year (normally 6th April to 5th April), and you can choose from a few different types of ISA, including cash ISAs and stocks and shares ISAs.

You can pay all of your tax-free savings allowance of £20,000 into your ISA(s), meaning you won’t pay income tax on the interest or dividends you might earn from your ISA. Plus, you won’t pay capital gains tax on the profit you make from your savings.

You might be wondering, “are children’s savings accounts tax-free?” If you’re the parent or guardian of someone under the age of 18, you can set up a Junior ISA, which offers tax-free interest. You can currently save up to £9,000 a year into a Junior ISA, but your child won’t be able to access the funds until their 18th birthday.

You may have heard of the starting savings rate, which was created to help low-income earners on £17,570 per year or less save money. The starting savings rate is a special 0% rate of tax on interest up to £5,000 (applicable to the 2024/25 tax year). This means you can earn up to £5,000 interest in your savings accounts completely tax-free. It’s worth noting that the starting rate for savings is reduced by £1 for every £1 of other income above your personal allowance.

Yes, tax-free savings accounts do come with some limits. Low-income earners who earn up to £17,570 a year are eligible for the starting savings rate. This includes your total personal allowance of £12,570, which is the amount you can earn before paying tax, plus the starting rate of £5,000.

As previously mentioned, the PSA allows anyone to earn a certain amount of money from their savings without paying tax, depending on their savings earnings and tax band. If you’re a basic-rate taxpayer, you can earn up to £1,000 in savings interest per year without paying tax on that interest, and higher-rate taxpayers can earn up to £500. This will increase your tax-free savings limit to £18,570, which includes your personal allowance of £12,570 (assuming you have not used this up on your wages, pension or other income), starting savings rate (£5,000) and your personal savings allowance of £1,000.

There are some exemptions and differences, depending on your personal circumstances. For example, the blind person’s allowance for the tax year 2024/25 is 3,070. You might also be eligible for the married couple’s allowance.

The main benefit of a tax-free savings account is, of course, that you won’t pay tax on the interest you earn from your savings. You’re also free to make withdrawals without incurring any penalties.

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 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, such as easy access savings accounts, notice savings accounts and fixed rate bonds.

While there’s a possibility you may have to pay tax on your savings, it’s unlikely unless you earn between £500 and £1,000 in interest, depending on your tax bracket, and you’ll typically benefit from higher interest rates. It’s always important to compare savings accounts, so you get the right type of account with the best interest rate for you.

In the UK, you can open up to four ISAs, meaning you could split your £20,000 allowance over those accounts. You cannot save £20,000 tax-free in each ISA. What’s more, if you have more than one type of ISA, you can only deposit money into one of them within a given tax year. Providing you are aged 18 or over, you can open the following types of ISA:

• Cash ISAs
• Stocks and shares ISAs
• Innovative Finance ISAs (IFISAs)
• Lifetime ISAs

While we don’t offer tax-free savings accounts through our marketplace, 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.

The information provided here is for informational and educational purposes only and does not constitute financial advice. Please consult with a licensed financial adviser or professional before making any financial decisions. Your financial situation is unique, and the information provided may not be suitable for your specific circumstances. We are not liable for any financial decisions or actions you take based on this information.