Savings accounts

In response to the COVID-19 pandemic, the Bank of England cut its base rate to the record-low 0.1% to help people with the cost of their mortgages and loans. While this has been welcome news for borrowers, it’s not so great for savers. Unfortunately, a lower base rate means lower interest on your savings.

To help customers who may need early access to their savings, many banks and building societies are being more flexible with their access rules to savings accounts.

If you want to open an ISA, you’ll need to be a UK resident or a crown servant (for example a diplomat, their spouse or civil partner).

Other than that, it’s up to each account provider to set their own rules. There might be age restrictions, so you may have to be 16 or 18 for some types of account, and some banks may reserve their best-paying savings accounts for customers who have a current account with them.

Some small building societies may restrict their accounts to people who live in their area. For example, the Ipswich Building Society only offers its savings accounts to existing members or people who live in its local postcode areas.

Make sure you check the eligibility rules for any account you’re considering.

Yes, most savings accounts are also available as joint accounts, although some providers may require one of you to be an existing customer first.

You can’t, however, open a joint ISA. That’s because it’s an Individual Savings Account intended for one person only.

Savings accounts are offered by banks, building societies and credit unions, and can also be offered by friendly societies and other financial institutions. Traditionally, banks use the money they hold as savings to lend to other people. They make a profit on the difference between what they charge for the loan, and what they pay you in interest.  
 
Interest is what you pay for borrowing money, and what banks pay you for saving with them. For example, if you choose an account that pays 2% AER interest and you deposit £1,000 for a year, at the end of the year you’ll have £1,020.18 – your original deposit of £1,000 plus £20.18 in interest. If the interest was only 0.1%, you would only earn £1 on your money. That’s why it’s important to find the best rate of interest for a savings account that suits your needs. 

What really makes a difference over time is the effect of compounding. This is when you earn interest on the interest that has been added to the account.  

Take a look at our example below. You can see how the value of the savings deposited builds up over time. In the example, you start with a deposit of £5,000 and don’t make any additional payments, but just leave the interest (at a rate of 2%) in the account. In year five, you’re earning roughly £10 more a year, thanks to interest on your interest:  

It depends on the type of savings account you have and how much you’ve saved in total. There are two types of savings accounts – taxed and tax-free. An ISA is a tax-free account.

Interest from other types of savings accounts counts as income, and how much tax you pay depends on how much interest you earn. Most people will earn all of their interest on savings, without paying any tax at all. That’s because you get a personal savings allowance of £1,000 interest tax-free if you’re a basic rate taxpayer, or £500 if you’re a higher-rate taxpayer.

You’ll pay tax on any interest over your allowance at your usual rate of income tax. That’s 20% for basic taxpayers and 40% for higher-rate taxpayers.

For more detail see tax on savings interest at GOV.UK.

Make sure your savings are in an account that is protected by the Financial Services Compensation Scheme (FSCS). This scheme applies to all banks and financial organisations that are regulated by the Financial Conduct Authority (FCA). Most deposits up to £85,000 are protected if the authorised bank or financial firm goes under. 

See more on Keeping Your Savings Safe.

Start by making sure you have at least three months’ worth of essential outgoings in an emergency fund. And get yourself into the savings habit by setting up a standing order or Direct Debit into a savings account.

Work out how much money you can save. You can potentially have more spare money by regularly reviewing your bills and making sure you’re not paying more than you need to, for services and resources like gas, electricity, phone, broadband and insurance. For example, you might be able to save £267** on your car insurance and £110** on home insurance by getting a better deal.

According to the Money Advice Service, it makes sense to save up a minimum of 10% of your earnings every month, or whatever you can afford.
But remember, before you start putting all your spare money into savings, you need to think of your long-term plans and goals, particularly your pension. As well as growing your savings, you may want to increase your pension contributions, or set up a pension if you don’t have one already. As with any financial investment, we’d always recommend seeking independent financial advice.

If you’re saving for big ticket items like a car or a wedding, use our handy savings calculator to help you work out how much to save and how long it’ll take.


**Based on Online independent research by Consumer Intelligence during May 2021 50% of customers could save up to £267.92 on their car insurance premium. 

***Based on Online independent research by Consumer Intelligence during May 2021 50% of customers could save up to £110.85 on their home insurance premium. 

Some savings accounts offer high interest rates as incentives for new customers. But once the introductory period is up, you could be left with an interest rate that’s much lower. It could be a good idea to stick around for the introductory rate, and then compare and switch again.

Always check the terms of the introductory rate, as breaking certain rules could mean you lose it – for example, if you withdraw money before the end of the introductory period.

Yes. You can have multiple accounts as long as you meet any requirements set by the account providers. This could offer you real advantages.

Different types of savings accounts offer different benefits, from easy access to higher interest rates. For example, you might want your emergency savings in an easy access account so you can get your hands on the money if you have a problem. Alternatively, you may want to consider looking for an account that locks your money away for a set period and offers you a higher rate of interest.

You might also want to use savings accounts in different ways. For example, a branch account where you can pop in and pay cheques easily, but another that you just manage on your phone.

If you do have multiple accounts, you’ll need to keep an eye on all of them so you can move money to the better-paying accounts, if interest rates drop or when fixed-term arrangements come to an end.

It depends on the rules of the account. Easy access accounts allow you to take your money out when you want, although some may specify a maximum number of withdrawals a year. Fixed term accounts might not let you take your money out at all until the end of the fixed-rate period, while others will let you do so, but might charge a heavy penalty.

You can set up a savings account for your child. Different accounts may be aimed at different age groups, so make sure your child is the right age for the account. Children’s accounts typically work in a similar way to adult savings accounts and offer as much variety. 
 
You can also set up a Junior ISA for your child. The money saved is put away until your child reaches 18, when it converts to an adult ISA and your child has full control over the money. It’s designed to keep savings tax-free long term, but as most children won’t pay tax on savings, this may not be a concern for you now. 
 
After a certain age, children can apply for a savings account themselves too. But under 16s may need a parent or guardian to go with them into a branch, so always check the details of the account.

Encouraging your children to save money from their pocket money or jobs, and from birthday and Christmas money, can help get them into the savings habit, giving them a good financial footing for when they’re older.​

This depends on the account you choose. Some accounts are opened and managed online or on the phone. Others require you to go into a branch or apply by post.

Use our comparison tool to easily see what you need to do, to open the account – it’ll be in the next steps box for each individual account.

Once you’re ready to apply for an account, you’ll need to have the basics to hand – your address, occupation and current bank details. You may need to prove your identity with a passport, driving licence or energy bill, particularly if you haven't banked with that provider before. If you want to open an ISA, you’ll need your National Insurance number too.

This will depend on your account provider. You may be able to close some accounts online, while for others you might have to visit a branch. If you have a fixed-term savings product, you might not be allowed to close it before the end of the term. Or if you do, you may have to pay a significant penalty​.
 
If you want to move your ISA to another provider, you’ll need to complete a transfer form. You shouldn’t close the account with the original provider without doing this, as you won’t be able to reinvest that part of your tax-free allowance again.