Tax-exempt savings plans from friendly societies

A tax-exempt savings plan is a small, long-term savings product sold by friendly societies. You pay in a fixed amount each month, the society invests it in its fund, and at the end of the term you get a lump sum free of income tax and capital gains tax. The catch is size: the law limits each person, including children, to £25 a month in these plans, so they are a supplement to other savings rather than a replacement for them¹.

The best-known example is the Children's Tax Exempt Plan from Foresters Friendly Society, a 10 year plan paying £25 a month that ends with a lump sum paid directly to the child, with no tax on the payout¹. Adults can hold similar plans of their own. Because the amounts are small, the value of these plans lies in the tax treatment and the discipline of regular saving over a long term, not in the scale of what you can put away.

How a tax-exempt savings plan works

A tax-exempt savings plan is a regular savings contract with a friendly society, a mutual organisation owned by its members rather than by shareholders. You agree to pay a fixed monthly contribution for a set term, commonly 10 years. The society pools the money from all its plan holders and invests it in its with-profits or similar fund. The value of your plan moves with the fund's investments, and at the end of the term you receive the money saved plus the investment returns, minus charges¹.

The tax treatment is what gives the product its name. The legislation that created these plans allows friendly societies to run regular savings plans whose returns are exempt from income tax and capital gains tax, provided the plans stay within the contribution limits. The Children's Tax Exempt Plan's provider states plainly that there is no tax to pay on the money the child gets at the end of the plan¹. That exemption applies to the whole payout, not just the growth, and it is a feature of the product structure rather than something you have to claim.

Because the plan is a contract with an insurance element, it is not a bank account. There is no balance you can dip into, no variable interest rate and no ability to move your money elsewhere without ending the plan. The trade for the tax exemption and the life cover is a commitment: the plan is designed to run its full term, and leaving early costs money, as the surrender charges later in this page show. This puts tax-exempt plans at the opposite end of the spectrum from easy access savings accounts, where the trade-offs are reversed.

Tax-free on top of your ISA allowance

The most common question about these plans is whether they interfere with an ISA. They do not. An ISA is a type of savings account where you do not pay tax on the interest or returns your savings earn², and you can deposit up to £20,000 into ISAs each tax year³. A tax-exempt savings plan is a completely separate product under separate legislation, so paying £25 a month into one uses none of your ISA allowance and does not prevent you from funding an ISA in the same year.

The ISA regime itself is generous. The legislation establishing ISAs allows individuals to save through ISA accounts without being taxed on any income or gains arising from those savings⁴, and individuals do not pay capital gains tax on disposals of ISA investments⁵. The Financial Ombudsman Service describes ISAs simply as "a way to save money tax free"⁶. Given that, the practical value of a tax-exempt plan's tax exemption is modest for most people: the amounts involved are small, and many people would pay little or no tax on savings returns anyway.

Interest earned in ISAs and other tax-free accounts does not use up your Personal Savings Allowance, the amount of savings interest you can earn tax-free outside tax-free wrappers⁷. A tax-exempt plan sits alongside ISAs in the same way: its returns do not consume any allowance. If you are weighing up where small monthly amounts should go, the guides to cash ISAs versus ordinary savings and how tax on savings interest works set out the comparison in detail.

Contribution limit: £25 a month per person

The limit is fixed by the friendly society tax-free regular savings rules: each person, including children, can save up to a maximum of £25 a month in such a plan¹. That is £300 a year, and over a 10 year term £3,000 of contributions. There is no flexibility to pay more in good months and less in others: the Children's Tax Exempt Plan fixes monthly contributions at exactly £25¹.

The limit applies per person, which is what makes these plans work for families. A parent can hold one plan, a child can hold another, and a second child can hold a third, each within their own £25 a month allowance. What one person cannot do is hold two plans: because contributions are fixed at £25, the provider states you cannot hold more than one plan¹. This mirrors the rule for Junior ISAs, where an eligible child may hold only one cash account and only one stocks and shares account⁸.

For context, £25 a month is half the amount allowed in the government's Help to Save scheme, which permits eligible individuals to save up to £50 per month⁹. If you are on a low income and building savings from nothing, Help to Save's 50% government bonus on up to £50 of monthly savings¹⁰ will usually outweigh the tax exemption on a friendly society plan, and the two are not mutually exclusive in principle, though each has its own eligibility rules. The Help to Save guide covers that scheme in full.

Fees and charges: £1.50 a month plus a fund charge

Two charges eat into a tax-exempt plan, and on a plan with fixed monthly contributions they are substantial in relative terms. First, there is a monthly administration charge of £1.50, which the provider takes directly from the plan by cancelling units¹. Second, there is an Annual Management Charge of 1.95% of the value of the fund¹, deducted from the fund itself rather than from your payments.

The effect is worth spelling out. Of every £25 paid in, £1.50 goes immediately to the administration charge, leaving £23.50 invested. The Annual Management Charge then reduces the fund's growth each year. The provider's own example returns, quoted later in this page, are stated as being after administration fees and charges¹, so the published figures already reflect these deductions. Even so, the charges are high compared with the cost of holding money in a savings account or a simple index fund, and the tax exemption has to be weighed against that drag.

There is no entry fee or exit fee as such, but cashing in early triggers the surrender charges described below, which function as an exit cost. Before opening any plan, ask the society for its full schedule of charges and check what happens to the plan's value if the fund performs poorly, since the Annual Management Charge is taken regardless of performance.

Life cover included, with no medical questions

Each plan includes life cover at no additional cost¹. This is not a full life insurance policy: it is a small benefit built into the plan contract, and its size depends on the plan holder's age. For a children's plan, until the child reaches the age of 10 the life cover is the return of the monthly contributions that have been paid into the plan so far. After the child turns 10, the life cover is calculated at 75% of the total contributions due over the plan's full term¹. In both cases the cover continues only as long as the monthly contributions continue to be paid¹.

Applying is simple on the health front: the provider states you will not have to answer any medical questions when applying for the plan¹. That makes these plans accessible to people who might struggle to buy standalone insurance, though the cover amounts are small and should not be treated as a substitute for proper protection if anyone depends on the plan holder's income. The protection insurance guide explains the main types of cover and how they work.

The tax treatment of life cover lump sums is favourable in general. Legislation provides that no liability to income tax arises on a life cover lump sum¹¹, and this rule is restated in later instruments¹². So a payout under the plan's life cover, like the maturity payout, arrives free of income tax.

Children's plans: saving £25 a month for a child

The children's version is the most widely sold form of this product. A Tax Exempt Plan for children is a 10 year tax-free savings plan which provides a lump sum payment for the child¹. An adult, usually a parent, grandparent or other family member, pays the £25 a month; the child is the plan holder for tax purposes. When the plan matures, all the money saved and all investment returns, less charges, are paid directly to the child¹, and there is no tax on that money¹.

The child cannot cash the plan in themselves until they reach the age of 16¹. Until then, the plan is managed by the adult who set it up. This makes the product a way to lock money away for a child's later teenage years or beyond, with the 10 year term doing the locking: money paid in at birth cannot come out as a lump sum until the term ends, and taking it out early costs a surrender charge.

How does it compare with the other main way to save tax-free for a child? A Junior ISA is a tax-free way to save for children up to the age of 18¹³, with much higher contribution limits than £25 a month, and a child may hold only one cash Junior ISA and one stocks and shares Junior ISA⁸. Child Trust Funds, the predecessor scheme, carry a similar tax exemption: no tax is chargeable on the provider, the nominee, the named child or the registered contact in respect of interest, dividends, distributions or gains on the account investments, subject to compliance with the regulations¹⁴. The children's savings accounts guide and the page on tax on children's savings cover the wider options, including the £100 rule on interest from money given by parents.

Cashing in early: charges from £125 down to £25

These plans are meant to run their full term, and the charges for surrendering early are designed to make sure of it. The provider's schedule of early surrender charges for the Children's Tax Exempt Plan is:

All figures from the provider's product page¹.

On a plan receiving £25 a month, £125 is five months of contributions, so surrendering in the first year can wipe out a significant share of what has been paid in, before any investment performance is considered. The charge steps down each year until it reaches £25, where it stays for the rest of the term. Even at its lowest, cashing in early may also lose the tax benefit: the tax exemption is tied to the plan running as a qualifying tax-free savings plan, so a surrendered plan's payout may not enjoy the same treatment as a maturity payout. Ask the society to confirm the tax position in writing before surrendering.

If you need money at short notice, a tax-exempt plan is the wrong place to look for it. Money you may need soon belongs in easy access savings or a notice account, where withdrawals are free or cheap. The fixed-bond early withdrawal guide explains the parallel rules for fixed-term savings accounts.

What happens if you miss payments

Life happens, and the plans have a grace mechanism. If you miss some monthly contributions, you have 13 months to pay the missing contributions, all together in one lump sum¹. That restores the plan to full standing, including its life cover, which depends on contributions continuing to be paid¹.

If the missed contributions are not made up within that window, the plan's future is at risk: the provider's terms tie the life cover and the plan's qualifying status to contributions continuing. Before letting a plan lapse, it is worth asking the society what the options are, because surrendering a plan part-way through triggers the charges in the table above, and a lapsed plan may pay out less than the amount paid in if the fund has not grown enough to cover the charges taken.

This is another reason the £25 a month commitment should be affordable from income rather than squeezed from a tight budget. If money is genuinely short, the priority order in the paying off debt or building savings guide is a better starting point than a 10 year contract with exit costs.

Capital at risk: what the example returns do and do not show

A tax-exempt plan is an investment, not a deposit. The money goes into the society's fund, its value can fall as well as rise, and the provider's example returns are past performance, not a forecast. The provider publishes one worked example: a £25 a month Children's Tax Exempt Plan commenced in August 2014 with a 10 year term provided a payout of £4,003.97, an average annual return of 5.58% and a total return of 33.47%, after administration fees and charges¹.

That example shows what a good decade looked like for this fund. It does not show what a poor one would look like, and it does not promise that the next 10 years will resemble the last. On £3,000 of contributions the payout was about £1,000 more than was paid in, but a fund that performs badly could return less than the contributions, particularly once the £1.50 monthly administration charge and the 1.95% Annual Management Charge are taken into account¹. The tax exemption protects the returns from tax; it does not protect the returns themselves.

This is the key difference from deposit savings, where the nominal amount you put in is what you get back plus interest. If capital certainty matters more to you than the tax wrapper, fixed-rate bonds and other deposit accounts, covered in the types of savings account guide, keep the nominal balance intact. The FSCS protection guide explains what happens if a deposit provider fails, which is a different protection from anything applying to investment performance.

Tax-exempt plans and benefits

Money held in a tax-exempt plan counts as capital for the means-tested benefits that look at savings, so it is not a way to shelter money from a benefits test. The rules vary by benefit: for 'New Style' Jobseeker's Allowance, a claimant's capital and savings, and their partner's capital, savings and income, are not taken into account¹⁵, whereas means-tested benefits such as Universal Credit do have capital limits. The effect of savings on benefits page explains where the thresholds sit.

The plan's structure can matter for benefits in one respect: because the money cannot be withdrawn without a surrender charge, some people treat it as inaccessible. That does not change how it is treated as capital, and the value of the plan, not what you could get for it today, is generally what counts. If benefits are part of your household's income, check the current rules before committing to a 10 year plan.

For comparison, the government's Help to Save scheme, aimed at people on low incomes receiving certain benefits, allows eligible individuals to save up to £50 per month⁹ with a 50% government bonus¹⁰, and eligibility for that scheme requires you to have a bank account¹⁶. Help to Save is designed for exactly the circumstances in which a friendly society plan's charges would bite hardest, and the Help to Save guide covers who qualifies.

FSCS protection and what is not regulated

The provider states that its children's savings plan is covered by the Financial Services Compensation Scheme¹. How that cover works depends on the plan's structure. FSCS explains that savings products structured as long-term contracts of insurance issued by regulated mutual insurers may be protected under insurance protection rather than deposits protection¹⁷. Friendly society plans are typically long-term insurance contracts, so the relevant FSCS cover is the insurance category, not the deposit protection that applies to bank accounts. The guide to investment protection and FSCS's own guidance set out the limits of each category¹⁸.

FSCS protection covers the failure of the firm, not the performance of the fund. If the society fails, FSCS may step in; if the fund simply performs badly, no compensation is due. FSCS also publishes exclusions worth knowing: it does not protect money paid under arrangements arranged by firms that are not regulated by the Financial Conduct Authority¹⁹, and most cryptoassets are not FSCS protected because they are not regulated²⁰. More broadly, a review of the law preceding the current framework noted that consumer savings schemes are not regulated as deposit-takers and many are not subject to any other direct regulation²¹, which is why checking that a scheme sits with a regulated society matters before paying money over.

One further boundary: the provider states that member benefits, the extra perks friendly societies offer their members, are not regulated by the Financial Conduct Authority or the Prudential Regulation Authority¹. The plan itself is a regulated product; the member benefits around it are not. If something goes wrong with a regulated plan, the Financial Ombudsman Service can consider complaints, as it does for ISAs and other investments⁶.

Who provides tax-exempt plans

Tax-exempt savings plans can only be sold by friendly societies, the mutual organisations the legislation was written for. The example used throughout this page is the Children's Tax Exempt Plan provided by POIS, which is part of Foresters Friendly Society¹. Other friendly societies sell equivalent adult and children's plans under their own names, including Healthy Investment, whose Tax Exempt Savings Plan has its own page on this site. The terms differ between societies: the fund, the charges, the surrender schedule and the life cover are all set by each society, so the figures in this page are Foresters' own and should not be assumed to apply elsewhere.

When comparing societies, the things to check are the ones this page has covered: the full charge schedule, the surrender terms, the fund's investment approach and past performance over periods that include poor years, and the society's FSCS position. A friendly society is owned by its members, so there are no shareholders, but that does not make its funds safer or its charges lower; the how building societies work guide explains the mutual model, which friendly societies share in outline. Free, impartial help is available from MoneyHelper if you are unsure whether a product of this kind suits your circumstances.