Guide to Tax-Free Savings in the UK for 2025

Elizabeth Anderson

Written by Elizabeth Anderson
Edited by Hannah Smith
Fact-checked by Joey Shadeck

April 02, 2025

If you’ve worked hard to save, you don’t want to lose nearly half of your earned interest to taxes. That’s why it’s important to consider tax-free savings accounts for cash savings whenever possible.

The most common options include ISAs and Premium Bonds. You might also consider pensions and children’s savings accounts, such as Junior ISAs, to maximize on your tax savings.

Understanding tax-free savings and their importance

Tax-free savings accounts should be a priority if you have a large amount of cash savings – whether you’re saving to buy your first home or you want to pay off a chunk of your mortgage.

If you keep your money in a standard savings or current account, you may have to pay tax on the interest earned. This is because only the first £500 of interest is tax-free if you’re a higher-rate taxpayer (earning above £50,270/yr). For example, if you have £10,000 in a savings account with a 5% interest rate, you’ll reach this £500 limit. Any interest earned beyond is taxed at 40%, meaning nearly half of it is lost to tax.

If you’re a basic-rate taxpayer (earning below £50,270/yr) you have a £1,000 annual personal savings allowance, after which any interest above that amount is taxed at 20%.

For additional-rate taxpayers (earning above £125,140/yr), you get no personal savings allowance, and all interest earned in standard savings accounts is taxed at 45%.

Bear in mind that savings interest counts toward your overall income. For instance, if you earn £50,000 and accrue £1,000 in savings interest, your total income increases to £51,000. This pushes you above the higher-rate tax threshold of £50,270, reducing your personal savings allowance from £1,000 to £500. As a result, £500 of your savings interest would be taxed at 40%.

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Types of tax-free savings accounts available in the UK

To reduce your savings tax bill, you should prioritise tax-free savings accounts whenever possible.

Tax-free savings accounts include:

insert_chartTax-Free savings limits at a glance

  • ISA Allowance: £20,000 per tax year
  • Junior ISA Allowance: £9,000 per tax year
  • Lifetime ISA Contribution Limit: £4,000 per tax year
  • Premium Bonds Limit: £50,000 per person

Individual Savings Accounts (ISAs)

Individual Savings Accounts (ISAs) are tax-free savings accounts, meaning you don’t have to worry about filing a tax return with HMRC on returns, interest or withdrawals made from an ISA. In the U.K., there are several types of ISAs, and you can contribute up to £20,000 per tax year across all your ISAs combined. There’s also a separate annual allowance of £9,000 for each additional Junior ISA.

Cash ISAs

Cash ISAs are ideal for short-term savings goals or emergency funds. Unlike investments, which carry risk, a cash ISA will guarantee you’ll get back every penny you put in, plus interest. It’s possible to currently earn around 4.5% on some easy-access cash ISAs – for example, the cash ISA offered by Trading 212.

Investment ISAs

A stocks and shares ISA is recommended for money you don’t plan to use for at least 5-10 years or more. There’s a stronger chance of your money growing further if invested in the stock market than money put in cash savings accounts, thanks to dividend payouts and growth in the value of your investments.

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Lifetime ISA

A Lifetime ISA is designed for first-time homebuyers or retirement savings. You can contribute up to £4,000 per year, and the government adds a 25% bonus. You can only withdraw money from a Lifetime ISA when putting down a deposit on your first home, or after age 60 for retirement. Like with a standard ISA, growth and withdrawals from a Lifetime ISA are tax free.

Junior ISA

Junior ISAs are for children under the age of 18. Parents can open an account, but anyone can contribute. Up to £9,000 can be paid into each individual Junior ISA every tax year. You can have a stocks and shares Junior ISA where returns depend on the performance of the investments, or a cash Junior ISA where set interest is paid. Funds in a Junior ISA are locked until the child turns 18, and then they can access the savings tax free.

Personal savings allowance

The personal savings allowance (PSA) lets you earn a certain amount of interest on your savings tax free before tax is applied.

  • Basic-rate taxpayers (earning less than £50,270/yr) have a PSA of £1,000. So, if you have more than £20,000 in a standard cash savings account earning 5% interest, you’d earn £1,000 in interest tax free. Any interest beyond this is taxed at 20%.
  • Higher-rate taxpayers (earning £50,271 - £125,140/yr) have a £500 PSA. Any savings interest beyond this is taxed at 40%.
  • Additional-rate taxpayers (earning more than £125,140/yr) don’t receive a PSA and pay 45% tax on all interest earned – unless the money is held in a tax-free savings account such as an ISA or Premium Bonds.

warningCommon mistake: exceeding your ISA allowance

You can split your £20,000 ISA allowance across different ISAs, but exceeding this amount in a tax year could result in tax penalties. Always track your contributions carefully.

The PSA applies across the U.K., even in Scotland, where the income tax thresholds are different, because savings interest is taxed using U.K.-wide rates.

Child tax-exempt savings plan

A child tax exempt savings plan is a tax-free way to save for your child, in addition or instead of a Junior ISA. These plans are offered by friendly societies in the U.K. including National Friendly, Foresters Friendly or One Family.

You pay in between £15 and £25 a month, or £165 to £270 a year, over 10 to 25 years. Unlike with a Junior ISA where the child gains access to the money at age 18, you can choose when they receive the money.

How it works is the money is invested in the stock market. At the end of the plan, there’s no tax to pay on any growth in the value. You’re guaranteed to get back more than you paid in with child tax exempt savings plans, but the fees can be high so you may get better value investing the money in a Junior stocks and shares ISA.

It’s important to note this is a regular savings plan. You can choose to pay in monthly or yearly. If you don’t keep making the payments, the money in the account will be taxed.

Pensions

Pensions can be another way to save tax efficiently because you get tax relief on contributions.

Essentially, any money you contribute to a pension is free from income tax when deposited. For example, if you pay £10,000 into a pension, the whole £10,000 would go in – rather than if you took it as income where you’d pay income tax between 20% and 45%.

You can contribute up to £60,000 into a pension each year (inclusive of tax relief) or as much as your annual earnings – whichever is lower.

The money in your pension also grows tax-free, meaning you won’t have to worry about capital gains tax, income tax, or dividend tax.

You can withdraw money from a private pension from your mid-50s. The first 25% of your pension savings are tax-free. The rest is subject to income tax, but you can manage how much you take out each year to keep tax as low as possible.

Premium Bonds

Premium Bonds, run by NS&I, are a popular way to earn tax-free returns on cash savings. You can pay up to £50,000 into Premium Bonds. You won’t earn interest, but you’re entered into a monthly prize draw with tax-free cash prizes ranging from £25 to £1 million.

The £50,000 Premium Bond limit is per person, so consider using a partner’s allowance to take your household total in Premium Bonds to £100,000.

Tips to maximize tax-free savings

To make the most of tax-free savings options available to you, consider these strategies:

  • Max out ISAs, taking advantage of the full £20,000 allowance as much as possible.
  • Consider Premium Bonds for short-term cash savings beyond ISAs.
  • Use your spouse or partner’s allowances where possible to boost tax-free savings even further.
  • Save into a pension to benefit from tax relief.
  • Consider saving into a junior ISA for a child.

Common mistakes to avoid

Here are some common mistakes to avoid to ensure you get the most from tax-free savings.

  • Exceeding the ISA allowance – It can be easy to go over the £20,000 ISA limit each tax year if you have multiple ISAs.
  • Keeping too much in cash ISAs – If you’re saving for the long term, a stocks and shares ISA may generate more growth.
  • Missing out on unused ISA allowance – Any unused £20,000 ISA allowance isn’t carried over to the next tax year, so fill your ISA as much as you can before 5 April each year. The new tax year starts on 6 April.
  • Transferring ISAs incorrectly – If you withdraw money from an ISA into your current account and then move it to another provider, this will count towards your current tax-year ISA allowance. Make sure you request an ISA transfer from your new chosen provider to keep your savings tax-free.

Tax implications of withdrawals

There are no tax implications when it comes to making withdrawals from a tax-free savings account. If taking money out of an ISA, you will not have to worry about paying tax on interest or growth. You also won’t have to declare ISA withdrawals to HMRC.

Because ISA withdrawals are tax-free, some retirees choose to withdraw income from ISAs before private pensions to avoid income tax and other taxes on their savings.

lightbulbISA Transfers: don’t lose your tax-free status

If you want to move your ISA to a new provider, always request an ISA transfer instead of withdrawing and redepositing the funds. A direct transfer keeps your savings tax-free.

Exceeding contribution limits

The amount you can pay into tax-free ISAs is a total of £20,000 per tax year. This includes:

  • Cash ISAs
  • Stocks and shares ISAs
  • Lifetime ISAs

For example, you can’t pay £20,000 into a cash ISA and £20,000 into an investment ISA in the same tax year.

However, the £9,000 Junior ISA allowance doesn’t count towards your own allowance. This is separate and is £9,000 per child.

FAQs

What is the annual tax-free savings allowance?

The annual tax-free savings allowance, also called the personal savings allowance, is:

  • £1,000 for those earning under £50,270/yr
  • £500 for those earning between £50,270 and £125,140/yr
  • £0 for individuals earning above £125,141/yr

This is the amount you can earn in savings interest before tax is due. Tax rates on interest are:

  • 20% for basic-rate taxpayers
  • 40% for higher-rate taxpayers
  • 45% for additional-rate taxpayers

Can I have multiple tax-free savings accounts?

Yes, you can own cash ISAs, stocks and shares ISAs, Lifetime ISAs, pensions and Premium Bonds. You can own, and pay into, multiple accounts of the same type.

It used to be that you could only pay into one cash ISA and one stocks and shares ISA each tax year, but this is no longer the case. However, you can only pay into one Lifetime ISA each tax year.

Make sure you don’t go over the overall £20,000 annual ISA allowance if paying into multiple accounts.

Are there any big changes to tax-free savings for 2025?

There are no big changes confirmed for tax-free savings in the U.K. in 2025. However, it’s rumoured that the government is looking into introducing a new annual cap of £4,000 for cash ISAs. The aim is to encourage more people to put their money into stocks and shares ISAs, where the potential for growth is higher over the long term.

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Elizabeth Anderson has been a financial journalist for more than a decade. She’s written for major national newspapers, contributed to corporate reports and research, and reviewed dozens of share dealing platforms, SIPP providers, ISAs, and brokerage firms. Elizabeth started her career at Bloomberg and has worked for the BBC, The Telegraph, The Times and the i newspaper. She is passionate about helping people understand finance and investing. A keen investor herself, Elizabeth invests through general dealing accounts, ISAs and several SIPPs.

Steven Hatzakis is a well-known finance writer with 25+ years of experience in the foreign exchange and financial markets. He is the Global Director of Online Broker Research for Reink Media Group, leading research efforts for ForexBrokers.com since 2016. He has served as a registered commodity futures representative for domestic and internationally-regulated brokerages. Steven holds a Series III license in the US as a Commodity Trading Advisor (CTA).

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Elizabeth Anderson

Elizabeth Anderson, lead writer and researcher, has been a financial journalist for more than a decade. In addition to her work with UK.StockBrokers.com, she has written extensively for major publications including BBC, The Times and Bloomberg. A keen investor herself, she is passionate about helping people understand finance and investing.

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