Offshore savings accounts explained Do I need an offshore savings account?

Piggy Bank Offshore Savings

Be sure to understand the pros and cons of offshore saving before you get started

Which? separates the offshore savings fact from fiction.

When you think of offshore savings, it’s possible you call to mind images of globetrotting millionaires who deposit money with overseas institutions in order to avoid tax. 

While there may be a grain of truth in this, many of the myths surrounding offshore savings aren't based in reality.

An offshore savings account may or not be the right product for you, depending on your personal circumstances – but, before opening one, it’s important to understand how they work and how to find the best account. 

FACT: Saving offshore means you can save in currencies other than sterling

Offshore accounts do not have to be held in sterling. They also come in dollars, euros and other currencies, so can be useful for businesspeople and frequent travellers.

However, it’s worth bearing in mind that you could lose out if you convert your savings back to sterling when the exchange rate is not favourable.

Go further: How to find the best offshore account - get the right account for your needs

FICTION: You need to be very wealthy to open an offshore savings account

This is a common misconception – but in fact some offshore saving accounts accept opening deposits of as little as £1.

Typically, however, you may have to invest a minimum of £5,000 or £10,000 to open an offshore savings account. Therefore, it’s fair to say that offshore accounts are rarely designed with ‘beginner’ savers in mind.

In addition, the charges for operating an offshore savings account may be high. Fees for making a withdrawal, for example, can be as high as £25 a time – so holding a small balance in an offshore savings account may not make financial sense.

FACT: Offshore saving doesn’t mean tax-free saving

While offshore bank accounts are associated in many people’s minds with tax evasion, it’s vital to remember that you will be liable for tax on the interest you earn from offshore savings unless certain conditions apply. 

If you use an offshore savings account to evade tax and are caught, you will have to pay HM Revenue & Customs whatever you owe plus interest and a fine.

Ordinarily, interest from a UK current or savings account is paid ‘net’ – that is, with tax already deducted. In most cases, this means 20% will automatically be taken off the total interest you earn on your savings each year. 

If you’re a higher rate taxpayer, you’re liable to lose 40% - and you may be required to fill in a tax return to ensure you pay the correct amount of tax on your savings.

On 6 April 2016, a new Personal Savings Allowance was introduced. Basic-rate taxpayers will have no tax to pay on the first £1,000 of interest, and higher-rate taxpayers will have no tax to pay on the first £500. However, interest earned above these thresholds will still be taxable.

Go further: Tax returns explained - get to grips with what you need to do to fill out a tax return

However, interest from an offshore savings account is often credited ‘gross’ – without any tax deducted from it. This can be of benefit to savers.

Although you will be required to declare any interest you earn from an offshore savings account and will ultimately have to pay any UK income tax due, there can be a substantial delay between earning interest on offshore savings and having to pay tax on it. For example, if your interest is paid once a year at the end of April, you could hold the previous year’s interest in your account for up to 20 months.

This ‘deferral’ of the income tax payment due on your offshore savings could allow you to earn a small amount of extra interest which would be unavailable to you if you saved in a UK-based account.

FICTION: Saving offshore means I’ll get a better return on my money

While offshore savings accounts often come with attractive-looking interest rates, these may not be any better than the rate you could get from a top UK-based savings account. It’s very important to shop around for the best possible deal before opening a savings account, and to consider which type of savings account might be best for you.

Also, don’t forget to take into account the impact of any tax you will have to pay on the interest you earn from your savings.

Go further: The Which? Money Compare tables - to search hundreds of savings accounts and cash Isa deals so that you can find a good home for your nest egg

FACT: Saving offshore could mean I’m taxed twice

Depending on where your offshore savings are based, it’s possible that you may be liable for overseas tax, as well as UK tax, on the interest you earn. It’s important to investigate this before depositing your money.

Where this is the case, it’s likely you will be able to claim UK tax relief on the tax you pay overseas.

However, it is unlikely you’ll be subject to tax both in the UK and in the country where you’re saving, as more than 100 double taxation agreements exist between the UK and other countries to help prevent this situation arising.

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