As a UK saver, you have a Personal Savings Allowance (PSA) that allows you to earn savings interest tax-free as a basic- or higher-rate taxpayer (the PSA reduces to zero for those paying the additional rate of Income Tax).

Interest rates remain moderate-to-high currently, especially compared to the last decade or so, which saw rates stagnating. While this is undoubtedly good news, it does mean that the value of your cash savings – and therefore the interest gained on those amounts – could push you over the PSA threshold. At that point, you’ll face a tax liability on your interest.

If this applies to you, you might want to rethink the amount you hold in cash savings and look to other tax-efficient vehicles like pensions or ISAs to hold your wealth more advantageously.

Keep reading to find out more.

The amount of savings interest that is exposed to tax depends on your Income Tax bracket

The PSA means that you can earn tax-free interest on savings up to certain limits, depending on the highest rate of Income Tax you pay. Your PSA as a:

• Basic-rate (20%) taxpayer is £1,000
• Higher-rate (40%) taxpayer is £500

• Additional-rate (45%) taxpayer is £0.

This covers savings across all bank and building society accounts you hold, as well as interest on government or company bonds.

As a basic-rate taxpayer, a savings account balance of just £50,000 with an interest rate of only 2% could see your money becoming liable for tax.

It’s important to have some funds in easily accessible cash accounts. Around three to six months of household expenditure in a high street savings account as an emergency fund can tide you over if the unexpected strikes.

But keep too much in cash and the problems could be twofold. First, you might find your interest becomes taxable. Secondly, if the rate of interest you receive is less than inflation, your money will effectively lose value in real terms.

For that reason, you might want to consider tax wrappers like savings and pensions. There are, though, pros and cons to these too.

Pensions are a tax-efficient investment vehicle, but your money is locked in until retirement

Pensions are incredibly tax-efficient. You receive automatic tax relief at 20% on the contributions you make, and you can claim further relief as a higher or additional rate taxpayer through Self Assessment.

A £100 increase to your pension pot costs you just £80 if you are a basic rate taxpayer, but just £60 and £55 if you are on the higher or additional rates, respectively. When the time comes to take your pension, you can usually receive up to 25% of your fund value tax-free.

Your invested amount grows free of Income Tax and Capital Gains Tax, allowing your fund to benefit from compound growth.

The cons to pension saving, of course, are that the money can’t be accessed until you reach pension age. This is currently 55 but will rise to 57 from 2028.

As such, you’ll need to be sure that the money you put into your pension isn’t needed elsewhere and budget accordingly. Paying your future self is an important part of long-term financial planning, and your pension is a tax-efficient way to do so, but the money is locked in, so it won’t be useful as an emergency fund.

Both Cash ISAs and Stocks and Shares ISAs have tax efficiencies to consider

ISAs are also incredibly tax-efficient. A Cash ISA works similarly to a regular savings account, but, unlike with your high street bank, ISA interest is tax-free. If you’re an additional rate taxpayer with no PSA, a Cash ISA might be a good option. There is the £20,000 ISA Allowance to consider, though, and upcoming changes will limit Cash ISA subscriptions for under-65s to just £12,000 from 6 April 2027.

Stocks and Shares ISAs will retain the full £20,000 ISA Allowance. What’s more, gains you make in a Stocks and Shares ISA are free of both Income Tax and Capital Gains Tax (CGT).

While investment comes with additional risk, the opportunity for rewards is higher too, all within a tax-efficient environment. Unlike a pension, you can usually access your funds relatively quickly too, although cash will likely remain the best place for your emergency fund.

Get in touch

Cash savings should form part of your long-term financial plan and are useful for covering one-off expenses in an emergency. But holding too much could expose the interest you earn to tax, and other tax-efficient options are available. Please contact us if you have any questions. de Mellow’s expert financial planners are on hand to help.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select, and the value can therefore go down as well as up. You may get back less than you invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief is generally dependent on individual circumstances.

SJP Approved 29/04/2026