Cash savings are an important part of your financial plan. Having a healthy emergency fund should mean that you’re better able to absorb unexpected costs such as home repairs or fixing your car. You might also rely on emergency savings if the cost of living increases and puts pressure on your budget. Additionally, cash savings can be useful for meeting shorter-term goals (i.e. less than 5 years) such as paying for a holiday or financially supporting your loved ones.
In recent years, as interest rates rose, you may have benefitted from more growth on your cash savings. However, this could mean that you’re more likely to pay tax, and it’s important to consider this when deciding where to put your wealth to keep it safe.
Read on to learn more.
Could you be at risk? 6 million savings accounts could breach the “Personal Savings Allowance” and trigger a tax charge
When you generate growth on wealth in a non-ISA cash savings account, you typically pay tax on any interest that exceeds your Personal Savings Allowance (PSA).
The PSA is different depending on your marginal rate of Income Tax. In 2024/25, your PSA is:
- £1,000 if you’re a basic-rate taxpayer (earning up to £50,270)
- £500 if you’re a higher-rate taxpayer (earning up to £125,140)
- £0 if you’re an additional-rate taxpayer (earning over £125,140).
You will pay tax at your marginal rate of Income Tax on any interest that exceeds your PSA.
For example, imagine you’re a higher-rate taxpayer with savings in a non-ISA account with an interest rate of 4.75% – the highest interest rate on an easy access savings account according to Moneyfacts on 19 February 2025.
If you had £20,000 in this account, you would earn £950 in interest. After applying the PSA, you would pay Income Tax at your marginal rate on the remaining £450, leaving you with a bill of £180.
An additional-rate taxpayer with no PSA would pay £427.50.
You might have more than £20,000 in a savings account if you hold a significant portion of your wealth in cash. If so, you may receive a notable tax bill, especially after interest rate rises in recent years.
That’s why MoneyAge reports more than 6 million UK savings accounts could be at risk of breaching the PSA and triggering a tax charge. If yours is one of these accounts, it’s important to consider ways to mitigate the tax you pay.
Saving in an ISA could help you reduce the tax you pay
Using tax wrappers is an effective way to mitigate the tax you pay on your savings. A Cash ISA could be a useful option here as you don’t pay tax on any interest you generate.
There are several different types of Cash ISA you might use. For example, you could save in an easy access Cash ISA, which typically allows you to withdraw funds freely without an additional charge.
Alternatively, you might use a fixed-term Cash ISA that allows you to lock your savings away for a set period, and these accounts may offer a higher interest rate. In some cases, you won’t be able to access the funds at all until the end of the period, while other accounts charge a fee for withdrawing your funds early.
You can contribute up to £20,000 across all your ISAs each tax year. Maximising this allowance could help you reduce the tax you pay on your cash savings interest. Your partner also has their own ISA allowance, so you could save up to £40,000 tax-efficiently between you.
However, it’s important to think carefully about the type of Cash ISA you use, and when you might need to access the funds.
For example, if you’re saving an emergency fund, you may need to withdraw the funds at short notice. In this case, an easy access Cash ISA might be more suitable. On the other hand, if you’re saving for a medium-term goal such as a dream holiday, you may be able to lock your savings away for a few years to secure a higher interest rate.
We can help you decide which type of ISA is most suitable for your goals. If you already have savings in a fixed-term ISA, our recent article outlines three options to consider if your term is coming to an end soon.
You may want to consider investing surplus savings
Keeping some cash in an emergency fund or to save for short-term goals could be useful. But if you hold a significant amount of your wealth in a cash savings account, you may be more likely to exceed your PSA and pay tax. You might find it difficult to achieve meaningful growth on your cash savings too, especially as interest rates have started to fall again recently.
You might benefit from investing surplus funds instead, especially if you want to build wealth for long-term goals that are more than five years away, such as your retirement.
While past performance doesn’t guarantee future returns, historical data suggests that you might see greater growth from investing than you would from a cash savings account.
According to MoneyWeek, a study from Barclays found that over the past 130 years, the probability of shares providing better returns than cash in a two-year period was 70%. That figure increases to 91% for a 10-year period.
Interest rates could increase in the future but based on past data, investing may generate higher returns and help you work towards your goals. If you invest in a Stocks and Shares ISA, you won’t pay Capital Gains Tax (CGT) or Dividend Tax on any returns you generate either.
We can support you in building an investment portfolio that helps to generate the necessary returns to achieve your unique financial goals. We’ll also consider your risk profile and whether you have any specific investment preferences. For more information on this, read our article on why it’s important to look beyond returns when investing.
Get in touch
If you’re worried about the tax you could pay on your cash savings interest, we can help you mitigate a large bill.
Email hello@fcadvice.co.uk or call 0333 241 9900.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate tax planning.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall risk profile and financial circumstances.