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What is a high interest current account?
A high interest current account is a current account that pays you interest on your credit balance. Your credit balance is the amount of available money you have in your bank account.
Your current account is your main bank account. It comes with a debit card, is typically used for day-to-day spending and is usually the account that your salary is paid into. Standard current accounts pay very little or no interest at all.
A high interest current account also gives you easy access to your money and a debit card for spending. But the biggest benefit is that you’ll earn money based on the interest rate the bank gives you. This rate is either fixed for a certain period, or it’s variable – which means it can be changed by your bank, who will alert you first.
How do high interest current accounts work?
Although interest accounts work in a similar way to standard current accounts, they often come with more restrictions and conditions, which can vary between accounts.
It’s a good idea to shop around and compare high interest current accounts, so you don’t waste time applying for one that isn’t suitable for you or that you don’t qualify for.
Common conditions with high interest current accounts include:
You’ll need to pay a minimum amount into your current account each month to receive interest – for example, £1,000.
High interest up to a limit
The interest rate may only apply to your balance up to a certain amount, for a fixed period of time. For example, 2% interest paid on the first £1,500 of your balance, for the first 12 months.
Account must stay in credit
Interest current accounts are usually aimed at people who stay in credit – after all, that’s what the interest is being paid on. You won’t get interest on an overdraft.
Some of the highest interest current accounts are reserved for under 18s or students.
Unlike many standard current accounts, some high interest accounts come with a monthly fee.
How do interest rates work?
The interest rate is the percentage your bank will pay you for saving money with them. In the case of interest current accounts, it’s the AER - or Annual Equivalent Rate. The AER is what you’ll earn in interest over the course of a year.
Depending on the high interest account, the AER you earn could be fixed (stays the same) or variable (goes up and down).
The AER that banks offer is influenced by the Bank of England base rate. If the base rate is low, the interest offered by banks will also be low – not such a great deal for savers. If the base rate goes up, then savers can usually get a better interest rate on their high interest accounts. If you’re on a variable AER deal, then the interest you earn could go up or down in line with the base rate.
You also need to take the rate of inflation into account when looking at interest rates. In other words, the average increase in prices over time. If the interest rate is lower than inflation, you’ll lose out because your money will buy you less than it would have done a year ago.
It’s best to look for an account that offers an AER higher than the rate of inflation.
What are the best high interest accounts?
After the Bank of England base rate was at a consistent low for around 10 years, it's been rising since late 2021. This means that higher-interest accounts are coming back on the market.
High interest accounts will have a maximum balance that you can earn interest on. If you have more than that to put away and don’t need everyday access to your money, it might be worth considering a cash ISA instead.
High interest current accounts: pros and cons
- The interest you earn can be better than most savings accounts
- The same convenience as a standard current account with easy access to your money
- The Personal Savings Allowance (see below) means most savers won’t need to pay tax on the interest they earn
- Many accounts come with offers like cashback, no debit card fees abroad and gift vouchers
- Restrictions and conditions can be strict
- High interest is usually up to a certain amount and/or for a limited period
- Once the high interest period is up, the rate can drop right down
- Might not be the best option if you’re depositing large amounts of money
- If you go into the red, overdraft fees can be painfully high
Frequently asked questions
Will I have to pay tax on a high interest current acccount?
The Personal Savings Allowance (PSA), introduced by the government in 2016, lets you earn a certain amount of interest on your savings without having to pay tax:
- If you’re a basic rate taxpayer (20%), you can earn up up to £1,000 in interest, per year, tax-free
- If you’re a higer rate taxpayer (40%), you can earn up to £500 in interest, per year, tax-free
It’s very unlikely you’ll earn this much interest in a year, so the majority of savers won’t have to pay tax on their savings.
How often will I be paid interest?
Most accounts pay interest each month as long as you stay in credit. Others may pay interest once a year.
Will my money be safe if the bank goes bust?
If your bank is UK-based, your money will be protected by the Financial Services Compensation Scheme (FSCS). Savings up to £85,000 per person, per bank, and up to £170,000 for joint accounts will be automatically compensated by the FSCS if the bank goes bust.
Can I have a joint high interest current account?
Most high interest current accounts are also available as joint accounts. Check with the provider first, as one of you might have to be an existing customer before you can open a joint account in both names.
Some providers will let you open an account in your name, then open another account with someone else in both your names. This means you’ll enjoy interest on two accounts, rather than one.
Can I open a high interest current account if I have a poor credit rating?
It depends on the conditions of the account. When you apply for a high interest current account the provider will run a credit check. If you have a low credit score you might be refused. High interest current accounts are mainly aimed at those with a good credit rating and you’ll need to stay in credit to benefit from the high interest rate. If you apply and are refused, it could hurt your credit rating even more – so think carefully before applying.
If you’re struggling to open a bank account because of bad credit, you might want to consider a basic bank account. You won’t earn interest or have access to an overdraft, but it could help you build a better credit score.
If you go overdrawn often, you might be better off with an account that offers an interest free overdraft.
To apply for an overdraft you must be a UK resident and aged 18 or over. Credit is subject to status and eligibility.
How easy is it to switch bank accounts?
Thanks to the Current Account Switch Service, switching bank accounts is quick and simple. Nearly all banks and building societies are signed up to the service, which guarantees that your account will be switched over within seven days. Once your application is accepted, your new bank will take care of moving over your balance and payments, and closing your old account. All you have to do is wait for your new debit card and bank details.
What should I watch out for when comparing high interest current accounts?
High interest accounts tend to have a lot more restrictions and conditions than standard current accounts. When comparing deals, check if any fees or charges could outweigh the interest you’d be earning.
What to look out for:
- Monthly fees
- Overdraft charges
- Using your debit card abroad – are there added charges?
- Minimum monthly deposits
- Maximum amount you’ll earn interest on
- How long the high interest offer lasts
- The interest you’ll earn once the offer ends
- Age restrictions
- Whether direct debits and standing orders are allowed
How do I apply for a high interest current account?
This depends on each provider. Some accounts – usually teenager accounts – can only be opened in-branch. Others like Monzo and Starling Bank are app-based and don’t have physical branches, so you can only apply online.
How do I compare high interest current accounts?
When you use our search tool, you’ll be shown a list of the latest current account deals sorted by the highest interest rate to the lowest. This gives you an easy way of quickly seeing which deals offer the highest AER. You’ll also be given details about each account so you can weigh up the pros and cons of each.
We compare current accounts from a wide range of banks, including the major high street names and newer challenger banks. Start a comparison now, to see you can start saving.
To apply for a current account you must be a UK resident and meet the age, status and eligibility requirements set out by the individual provider.
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What our expert says...
“If you want to get more out of your everyday banking, a current account that pays interest could give you a better return than some savings accounts, especially while interest rates are very low. Before you open an account, make sure you check any limits and introductory periods.”
- Alex Hasty, Insurance and finance expert