It is not permissible to deposit money in riba-based banks, unless that is necessary to protect the money, if there is no Islamic bank that is free from riba. In that case one must limit it to putting money in current accounts only [i.e., those that do not bear interest], so as to commit the lesser of two evils, and because necessity should not be exaggerated.
If any interest is paid on the deposited money, then it must be got rid of, by spending it on various charitable causes.
The Standing Committee for Issuing Fatwas was asked: I am a student in Britain, and we have to pay some taxes to the government, such as road tax and another tax (VAT) of 15% on anything we buy except food and children’s clothing. Now there is a new tax on municipal services which are provided the local municipality, such as education, waste disposal, swimming pools, parks, leisure centres and social services. Since we do not benefit from most of these services, as they are contrary to the teachings of our religion, and we only benefit from education, waste disposal and children’s playgrounds, and we are obliged to pay these taxes, which are between 3000 and 4000 Saudi riyals per year, my question is: Is it permissible for me to put some money in a deposit account, which is a riba-based account that yields 12% interest per year, and pay some of these taxes using this interest that I will get from this account? Because paying these taxes will put pressure on me financially.
They replied: It is not permissible for you to open an interest based account in order to pay off taxes with this interest, because of the general meaning of the evidence that riba is haraam. End quote.
Shaykh ‘Abd al-‘Azeez ibn Baaz, Shaykh ‘Abd al-Razzaaq ‘Afeefi, Shaykh ‘Abd-Allaah ibn Ghadyaan.
Fataawa al-Lajnah al-Daa’imah (13/366)
This applies to one who wants to deal with riba in order to pay off taxes with the interest. But if a person has been dealing with riba or put money in the bank and did not know that they had been giving him interest on it, then he wants to repent and get rid of this interest, there is no sin on him if he uses it to pay these taxes, so as to ward off wrongdoing from himself. We asked Shaykh Yoosuf al-Shubayli about that and he replied that there is nothing wrong with paying taxes with interest, but that is subject to the condition that one does not deal with riba in order to pay taxes.
And Allaah knows best.