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UPDATE 1:

I ask this question because I don't understand why there is a large market for tax free savings account, when your savings should already be tax free...

ORIGINAL QUESTION:

I am in the UK, I want to start saving £500 a month into my current account, i.e. an account which does not give me interest for having the money in the account.

My taxes are taken straight from my wages and what remains goes into my standard bank account, from which I plan to setup a standing order to automatically move £500 each month from account 1 to account 2.

If I do this without fail for 20 years, I will have £120,000 in account 2.

My question is, will I be taxed on the money in the second account?

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No you will not be taxed for the money in account 2. You have already paid for the tax on the money saved. There is no interest earned on the amount and hence it is not taxed.
In UK the interest on ISA [Individual Savings Account] is not taxable as well. Hence you may even transfer the money to account 2 that is an ISA and not a current account.

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  • So what is all this tax free saving stuff all about? if you don't get taxed on your savings? – oshirowanen Mar 30 '11 at 9:57
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    @user2662, I don't fully understand the comment, can you elaborate with example. The tax is mostly on Income you earn than on the savings you have. In order to reduce your tax on Income you may invest in certain items that would reduce tax liability. – Dheer Mar 30 '11 at 10:05
  • For example, on tv i always see these adverts about starting a tax free savings account, which I don't understand. If you don't get taxed on your savings, why is there a huge business around tax free savings accounts? – oshirowanen Mar 30 '11 at 10:07
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    If you keep the 120,000 in a normal account and Bank pays you an interest of say 10,000. You would be liable for tax on this 10,000. However if you open a designated ISA [Individual Savings Account], and they pay you 10,000 as interest you don't have to pay tax on this 10,000. Remember the tax saved is on the interest [income] earned [either from investment account, bond or any ohter means]. It is never on the original funds on which tax is already paid. Refer to whats considered as income here hmrc.gov.uk/incometax/taxable-income.htm#1 – Dheer Mar 30 '11 at 10:11
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I'm pretty sure you are don't actually plan to put £120,000 into a zero interest account, because when you take inflation into account, in 20 years, then £120,000 won't be worth anywhere near that amount.

For its value to grow you need the interest rate to exceed the rate of inflation and so paying 20% (or even 40%) tax on the interest can make the difference between whether being richer and getting poorer.

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