There is little point opening an offshore account in the hope of dodging tax, though. Despite scandals involving high profile names using offshore accounts to avoid paying tax, you are generally liable for tax on the interest you earn in the same way you would be in the UK.
We explain how offshore accounts work and why you might want one.
What are offshore accounts?
Offshore accounts are savings accounts located outside the holder’s country of residence, in this case the UK.
They can be used to stash euros and dollars (as well as other currencies), which can be handy if your salary is not paid in sterling. Most accounts can be opened by anyone over the age of 18, although some are only available to those living outside the UK.
While it is often necessary to invest at least £5,000 or £10,000 to open one, others require a minimum deposit of just £1.
Offered by many high street banks and building societies as well as private banks, most of the offshore accounts available to UK savers are based in the Channel Islands or the Isle of Man (which have separate tax jurisdictions) and, as such, can be operated by post, phone or online.
Is an offshore account for me?
Offshore accounts are not for everyone, but they are useful if you work or live abroad, regularly travel overseas or hope to retire to another country.
The ability to save in the currency in which you are paid or expect to fund your retirement, for example, removes the risk of losing out on exchange rate fluctuations.
Some people actually use offshore accounts to ‘play’ exchange rates in a bid to boost their returns by converting the cash back into pounds when sterling is weak (as well as deferring the tax bill on their returns – see below for more details).
However, you could lose out if you have to change your savings back to sterling when the exchange rate is poor.
Even though some offshore accounts can be opened with £1, the high operating charges – withdrawal fees can be up to £25 – make them less attractive to smaller savers or those needing regular access to their money.
...contrary to popular belief, you don’t have to be hugely wealthy to take advantage of offshore accounts
What different types of offshore account are there?
Offshore accounts come with both variable and fixed interest rates. Variable-rate accounts often come with introductory bonuses and offer relatively easy access to your money, while those paying fixed rates generally require you to lock away your savings for between one and five years – just the same as standard savings accounts
What are the tax implications?
Standard savings accounts used to pay interest after tax has been deducted at the basic rate of 20%, while offshore savings accounts have always paid interest without deducting tax. Since April 2016, both standard and offshore savings accounts pay interest without any tax deducted. This is due to the introduction of the new Personal Savings Allowance. Basic-rate taxpayers 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, so you can't use offshore accounts to avoid paying tax.
You are obliged to declare any savings interest earned to HM Revenue and Customs (HMRC) on a self-assessment tax form and to pay tax on it in due course. Otherwise, you could face a big fine – plus interest on whatever you owe.
However, sophisticated savers can take advantage of the delay between earning the interest and paying tax on it to boost their returns by keeping the extra cash in their accounts for longer.
Is my money safe in an offshore account?
Savers with money in a Financial Conduct Authority (FCA) authorised bank or building society in the UK are protected by the Financial Services Compensation Scheme (FSCS), which covers the first £85,000 (as of January 2017) held with each banking institution.
However, money held in an offshore savings account is not protected in the same way – even if the offshore arm of a UK high street bank operates the offshore account you choose.
Before opening an account, you should therefore check with your provider to see whether your money will be protected by a different compensation scheme.
Banks licensed by the Guernsey Financial Services Commission, for example, are covered by the Guernsey Banking Deposit Compensation Scheme, which protects the first £50,000 per person, per bank.
The Isle of Man's Depositors' Compensation Scheme, meanwhile, also protects up to £50,000 per individual saver.