Strategies to Evade Taxes on Savings Affecting 2.6 Million Individuals, To Reach a Peak
In the ever-changing landscape of personal finance, understanding how to save tax-efficiently is crucial. Here's a breakdown of the best strategies to shield your savings from tax in the UK, focusing on the Personal Savings Allowance (PSA) and Individual Savings Accounts (Isas).
The Personal Savings Allowance (PSA) is a key tool that allows you to earn a certain amount of interest tax-free each year, depending on your income tax band. Basic rate taxpayers (earning between £12,571 and £50,270) can earn up to £1,000 tax-free, while higher rate taxpayers can earn up to £500. However, additional rate taxpayers do not have a tax-free allowance for savings interest.
To avoid tax beyond the PSA limits, the most straightforward way is to save via an Individual Savings Account (Isa). This financial product offers tax-free interest regardless of the amount, and the Isa allowance for the 2025/26 tax year remains at £20,000 per year, which you can split across cash or stocks and shares Isas. Isas also allow flexible withdrawals and replacements within the same tax year if you have a flexible Isa account.
From April 2027, banks will be required to collect National Insurance numbers on new and existing savings accounts to help HMRC better collect any tax owed beyond the PSA, indicating stricter enforcement ahead.
In addition to Isas, investing in government bonds (gilts) can be a tax-efficient alternative for those with larger amounts of cash. Price gains made on gilts are exempt from capital gains tax, and if you hang on until the maturity date, you get all your money back, except in the unlikely event that the UK defaults on its debt.
Tens of millions flock to National Savings and Investments (NS&I) for the monthly Premium Bonds draw. The maximum you can invest in Premium Bonds is £50,000, and any prizes won are tax-free. However, winning a prize is not guaranteed, and the interest earned from Premium Bonds is subject to the PSA.
Another strategy to cut a tax bill is to transfer some of your personal allowance to your spouse, if they earn less than you and below £12,570. This can help reduce your overall tax liability.
The reason for the increase in taxed savers is due to the frozen Personal Savings Allowance (PSA) for nearly a decade. In the tax year 2025-26, 2.64 million people will pay income tax on the interest earned from their savings accounts, compared to only 647,000 four years ago. A basic rate taxpayer would breach their PSA with £19,600 in the top easy-access account in 2025-26, compared to £154,000 in 2021. Similarly, a higher-rate taxpayer would breach their PSA with £9,800 saved in 2025-26, compared to £77,000 saved in 2021.
In conclusion, using your £1,000 or £500 PSA to shelter some interest, maximising tax-free savings via Isas up to £20,000 annually, considering flexible Isas for better access and control, and being aware that tax authorities will more proactively enforce tax collection on savings interest from 2027 onward, are effective ways to legally minimise income tax on savings income in the UK. Avoiding tax beyond these limits would require illicit means and is not advised.
Investing in Individual Savings Accounts (Isas) can offer tax-free interest, making them a valuable tool for shielding savings from tax in the UK, particularly since high-interest savings can quickly exceed the Personal Savings Allowance (PSA) limit. If you have larger amounts of cash, investing in government bonds (gilts) could be a tax-efficient alternative, as price gains are exempt from capital gains tax. Lastly, transferring some of your personal allowance to your spouse, if they earn less than you and below £12,570, can help reduce your overall tax liability.
