Tax-Free Ways to Grow Your Money in the UK

There are several ways to save and invest in the UK without paying tax on the returns. Here’s an overview of the main options.

ISAs (Individual Savings Accounts)

An ISA is a tax-efficient wrapper - any interest, dividends, or capital gains earned inside one are completely free from UK income tax and capital gains tax.

Every UK resident aged 18 or over gets a £20,000 annual ISA allowance, which can be split across four types:

Type	What it holds	Annual limit
Cash ISA	Cash savings	£20,000*
Stocks & Shares ISA	Investments (funds, shares, bonds)	£20,000
Lifetime ISA	Cash or investments	£4,000 (counts towards £20,000)
Innovative Finance ISA	Peer-to-peer loans	£20,000

*From April 2027, the Cash ISA limit will be cut to £12,000 for under-65s.

For a detailed breakdown of each type, see our article on the 4 types of ISA.

Key points

• The £20,000 allowance resets each tax year (6 April to 5 April) and unused allowance doesn’t carry over
• Since April 2024, you can open more than one ISA of the same type per year
• The Lifetime ISA includes a 25% government bonus (up to £1,000/year), but carries a 25% penalty on early withdrawals outside of buying a first home or retirement after 60

NS&I Premium Bonds

Premium Bonds are a savings product issued by National Savings & Investments (NS&I), backed by HM Treasury. Instead of earning interest, your money is entered into a monthly prize draw.

How they work:

• You buy bonds for £1 each (minimum £25, maximum £50,000 per person)
• Each £1 bond is entered into a monthly prize draw
• Prizes range from £25 to £1 million, and are completely tax-free
• The current prize fund rate is equivalent to 4.00% annually, though individual returns vary based on luck
• Your capital is secure - you can cash in your bonds at any time and get back what you put in

Key details:

• 100% capital security - NS&I is backed by HM Treasury, so your money is fully protected (not limited to the £85,000 FSCS cap)
• Prizes are paid tax-free - they don’t count towards your Personal Savings Allowance or any other tax threshold
• There is no guaranteed return - you could win nothing in a given month, or win multiple prizes
• Bonds must be held for a full calendar month before they’re entered into the draw

Personal Savings Allowance

The Personal Savings Allowance lets you earn a certain amount of interest tax-free on savings held outside an ISA:

Tax band	Annual tax-free allowance
Basic rate (20%)	£1,000
Higher rate (40%)	£500
Additional rate (45%)	£0

This applies to interest from bank accounts, building societies, and other non-ISA savings. It’s separate from your ISA allowance - you get both.

Note: from April 2027, tax rates on savings income are increasing by 2 percentage points, making the Personal Savings Allowance more relevant for those with larger savings balances.

Pensions

Pensions are one of the most tax-efficient ways to save in the UK. Contributions receive tax relief - the government tops up your contribution based on your income tax rate:

• Basic rate taxpayers - contribute £80, the government adds £20 (effectively £100 invested)
• Higher rate taxpayers - can claim an additional £20 back through self-assessment (effectively £60 for £100 invested)
• Additional rate taxpayers - can claim an additional £25 back (effectively £55 for £100 invested)

Key details:

• The annual allowance for pension contributions is £60,000 (or 100% of your earnings, whichever is lower)
• Investment growth inside a pension is tax-free - no capital gains tax or income tax on dividends
• You can access your pension from age 55 (rising to 57 from April 2028)
• The first 25% of your pension can be taken as a tax-free lump sum
• The remainder is taxed as income when you withdraw it
• Employer contributions don’t count towards your personal tax relief, but do count towards the annual allowance

Starting Rate for Savings

If your total income (from employment, pensions, etc.) is below £17,570, you may be eligible for the starting rate for savings. This provides up to £5,000 of tax-free savings interest, on top of the Personal Savings Allowance.

The £5,000 band reduces by £1 for every £1 of income above £12,570 (the personal allowance). So if your non-savings income is £17,570 or more, the starting rate doesn’t apply.

How Lunar Helps

Lunar brings all your accounts - ISAs, pensions, savings accounts, and investments - into one dashboard. You can see which of your savings are in tax-efficient wrappers and which are exposed to tax, helping you understand the full picture of where your money sits.

---

Sources

• Individual Savings Accounts (ISAs) - GOV.UK
• Premium Bonds - NS&I
• Tax on savings interest - GOV.UK
• Pension tax relief - GOV.UK

Join the waitlist to track your tax-efficient savings with Lunar.