An expert has spoken about how to grow your savings tax-free (Image: Getty)
Savers risk completely overlooking an account that could allow them to grow their funds tax-free. A savings expert has urged people to think about moving around their savings ahead of an April deadline.
If you are holding your cash in a traditional savings account, you could be needlessly paying tax on your growth as a result. Basic rate taxpayers can earn up to £1,000 a year in interest tax-free. Any growth above this limit is taxed at your marginal tax rate.
However, you can avoid an HMRC bill by making deposits into ISAs. These accounts are entirely tax-free, and you can deposit up to £20,000 a year into them. You can split the allowance to make deposits into cash ISAs or into stocks and shares ISAs.
Your savings become taxable
Josh Raymond, UK managing director at investment platform XTB, said one of the biggest issues in the UK savings landscape is that people simply don’t use ISAs. He warned: “Many people leave cash in traditional savings accounts without realising that once they exceed their personal savings allowance, the interest becomes taxable.”
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He said there can be huge tax savings if you build up ISA funds over the years. The expert said: “The tax advantages can be significant over the long term.
“Outside an ISA, savers may pay income tax on interest, and investors can face capital gains or dividend tax once allowances are exceeded. Inside an ISA, interest, dividends and capital gains are all free from UK tax.
“That allows returns to compound more efficiently and keeps more of the growth working for the individual rather than being lost to tax.” A key change to the ISA allowance is coming up soon.
From April 2027, you will only be able to use up to £12,000 of the allowance for cash deposits or investment-based accounts, while the remaining £8,000 will have to be used for stocks and shares ISAs. People aged 65 and over will be spared from this and will retain the current allowance.
Mr Raymond said: “Of course, tax rules can change and outcomes depend on individual circumstances, but the ISA wrapper remains one of the most effective ways to protect returns over time.”
More flexibility needed
Looking at how the ISA rules could be improved, Mr Raymond said the current system can be opened up to provide more choice for savers. He said: “Greater flexibility to move between cash and investments within the same tax year, without friction or excessive admin, would help people adapt as their needs change.
“Making transfers faster and more seamless across providers would also encourage competition and engagement. When the process feels slow or restrictive, many people put decisions off.”
He also made the case for increasing the annual allowances. The expert said: “There’s also merit in exploring higher overall contribution limits over time, particularly as inflation erodes the real value of allowances.
“Clearer, more consistent communication around how ISAs work and what they can be used for would support better decision-making and help more people see them as a long-term wealth-building tool rather than just a once-a-year tax exercise.”