A guide to tax on savings: Tax-efficient ways to save with an ISA

Building savings is an important piece of the financial wellbeing pie. Savings can be your stepping stone towards a life goal, a safety net for the unknown or provide peace of mind for the longer term. Finding a tax efficient savings account can be one of the most effective ways to save your money. If you’re exploring your options, keep reading for a simple overview of why an ISA (Individual Savings Account) could tick all the boxes when it come to your saving needs.

Tax on savings: What you need to know

When it comes to saving money, one of the top questions many savers have is about the tax implications. Understanding the personal savings allowance and how investment income works will help make sure you’re making the right choice for your money. And with the ISA allowance deadline for this tax year approaching on 5th April, now is the perfect time to explore how you can make the most of this opportunity.

Do you have to pay tax on your savings?

Thanks to the introduction of the Personal Savings Allowance (PSA) in April 2016, the tax landscape for savings has significantly improved for savers. Before the PSA, a portion of savings income would typically go to the taxman. Now, the PSA rewards savers by allowing a certain amount of interest from savings to be earned without being subject to tax.

As the PSA is linked to your income, it will depend on what taxpayer bracket you’re in. For example, Basic-rate (20%) taxpayers qualify for a £1,000 PSA. Meaning your savings can earn up to £1,000 a year in interest without being subject to tax. To find out what the PSA means for you and for more information on your savings journey  just visit our dedicated article.

Tax-efficient ways to save with an ISA

ISAs offer a straightforward and tax-efficient way to save. Here's how you can benefit from an ISA:

How does an ISA work?

Each tax year, you're given an ISA allowance which lets you save a certain amount of money tax free. For this tax year, 2023/2024 the allowance is £20,000 and this won’t change for the 2024/2025 tax year. This is the maximum amount which can be deposited into your ISA account(s) and all the interest earned will be free from income tax. In 2024/2025 there will be some upcoming rule changes which affect how you can divide this allowance between various ISAs, offering you even more flexibility as an ISA saver. We’ll have update you with the details once these are confirmed.  

Cash ISAs

A cash ISA works like a standard deposit account but with a significant benefit: you won’t pay income tax on the interest you earn. This great feature makes Cash ISAs an attractive option for savers looking to boost their returns without worrying about tax implications.

Discover the top benefits of Cash ISAs here.

Fixed Rate ISAs

A ‘fixed rate’ is a guaranteed interest rate for a set length of time. During this time, you won’t be able to access your money, but you will know exactly how much you’ll earn in interest for the savings term, making them an ideal choice for long-term savings goals.

Key benefits of a Cash ISA

At Hodge, we care about what your finances mean for you. So, we make the process of opening a savings account with us feel straightforward and transparent.  Our fixed-rate ISA accounts come with a range of features designed to provide security, convenience and peace of mind:

• Guaranteed interest rates: secure a competitive interest rate for your chosen term, without worrying about rate fluctuations. Choose a 1, 2, 3, or 5 year term
• Online account management: easily open and manage your account online, with a minimum deposit requirement of £1,000  up to a maximum of £1,000,000
• Tax-free interest: enjoy tax-free interest up to £20,000, with the peace of mind that comes from FSCS protection.

If you’d like more information or support, watch our Cash ISAs explained video.

Remember, when considering ISAs, it’s best to consult with a financial advisor to tailor your approach to your individual circumstances.

More help and support with tax on savings

To find out the answers to some more common question savers have about tax and your Personal Savings Allowance (PSA), read our blog, Do I have to pay tax on my savings?

If you’d like to learn more about ISAs, read our blogs, 'What happens to my ISA at the end of the tax year', ‘How savings accounts work: ISAs explained’ and ‘Three great benefits for anyone using a cash ISA’. 

If you’re looking to open a savings account, you can find Hodge online rates for ISAs here. 

This article is correct at time of publishing and for general information purposes only. We recommend you speak to a professional financial adviser for advice. You can find a financial adviser and further personal finance information at unbiased.co.uk.