Savings Accounts

Types of savings account

Providers offer several kinds of savings account, each with a different trade-off between access and return:

• Easy-access — withdraw whenever you like; rates are usually variable and can change
• Fixed-rate bonds — a set rate for a set term, but you usually cannot withdraw until it ends
• Notice accounts — a higher rate in return for giving notice (for example 30 or 90 days) before withdrawing
• Regular savers — reward you for paying in a set amount each month, often with limits

How interest works

Savings interest is usually shown as an AER (Annual Equivalent Rate), which lets you compare accounts on a like-for-like basis over a year. A variable rate can go up or down; a fixed rate stays the same for the term.

Interest can be taxable. Many people pay no tax on savings interest because of the Personal Savings Allowance, and interest earned inside a cash ISA is always tax-free. Check the current allowance for your circumstances before assuming your interest is tax-free.

Tax on savings interest

Most people pay no tax on their savings interest because of the Personal Savings Allowance (PSA). Basic-rate taxpayers can earn £1,000 of interest a year tax-free, higher-rate taxpayers £500, and additional-rate taxpayers get no PSA. Interest earned inside a cash ISA does not count towards this at all — it is always tax-free.

People on a low income can also benefit from the “starting rate for savings”, which allows up to £5,000 of savings interest to be tax-free where other income is low; this tapers away as your other income rises. If you do owe tax on interest, HMRC usually collects it by adjusting your tax code rather than asking you to pay it separately.

Choosing a savings account

Think about when you will need the money. If you might need it at short notice, an easy-access account is safer even if the rate is lower. If you can lock money away, a fixed-rate account or notice account usually pays more. Always check whether the rate is introductory and what it drops to later. Deposits with an authorised provider are covered by FSCS protection up to £120,000, and for longer-term goals it is worth weighing saving versus investing, as investments can fall as well as rise.