See what you need to know about how savings
accounts work and what to consider when choosing an account. The best interest rates available differ among providers and depend on a variety of factors.
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During the ongoing COVID-19 pandemic, times are hard for savers, with many drawing comparisons to the financial crisis in 2008, with historically low interest rates. In March 2020, the Bank of England cut the base rate twice, from 0.75% to 0.1%. This is the lowest base rate in the UK’s history.
While times are tough, you’ll probably want to make the most of the best rates you’re eligible for, with an account that suits how you want to access and run it.
It’s estimated that 11.5 million UK adults have less than £100 in savings, according to the UK Strategy for Financial Wellbeing 2020-2030 report published by the Money and Pensions Service in January 2020, while nine million people borrow money to pay their monthly bills. But it’s not all bad news.
The same report has set a target of creating a ‘Nation of Savers’, increasing the number of monthly savers from 14.7m to 16.7m by 2030. If you’re someone who’s already saving, or looking to take greater control of their financial future, you’ll want to be clever with your money by putting it in the right savings account. Here’s our guide on how to avoid pitfalls and compare savings account rates.
What is a savings account?
A savings account is a type of bank account where you put money that you are not spending. You deposit money with the bank and the bank pays you interest in return for saving with them.
Savings accounts are simpler than current accounts which are designed for everyday banking like paying bills. For example, you can’t have an overdraft with a savings account. A savings account is there for you to put money away safely, so it’s available when you need it. It can help you build up a lump sum, and earn you interest on money that you don’t need for other things.
What types of savings accounts are there?
This information here doesn’t cover all the options, but it should give you an idea of the main types of savings accounts out there.
Instant access savings account
Instant access accounts let you withdraw money when you need it, so they are a good place to save for emergencies. Interest rates can vary over time.
- Instant access - pay in or take out money whenever you want.
- Interest rates - Annual Equivalent Rates (AER) are usually lower than fixed term accounts.
- Good for when you need cash savings in an emergency and short-term savings.
- Interest taxed only after personal savings allowance limit is reached. (You won’t pay tax on the first £500 to £1,000 of interest earned, depending on your tax band.)
If you know you won’t need money for some time, a fixed rate savings account gives you the certainty of knowing how much interest you’ll get in total. This is because the rate of interest is set for the whole term. You’ll need to be sure you can afford to tie your money up for a fixed period.
- Leave your money for a fixed term (usually 1-5 years).
- If you want to access the money early you’ll usually pay a penalty; early access is not possible for some accounts.
- Interest rates (AER) are usually higher than those available on instant access accounts.
- Good for medium-term savings.
- Access at the end of the fixed term.
- Interest taxed above personal savings allowance limit.
Regular savings account
If you really want to get into the savings habit, this kind of account means you save the same amount of money every month. There are usually rules about how much you can put in and take out. They generally pay a slightly higher rate of interest.
- Save a set amount each month.
- Interest rates (AER) are usually higher than for instant access accounts.
- Typically, interest depends on you keeping up regular payments.
- Good for building up a savings pot.
- Access varies.
- Interest taxed after personal savings allowance.
With an ISA (Individual Savings Account) you don’t pay tax on any interest earned. There’s a limit on the amount you can pay in every year. ISAs were designed by the UK Government to encourage long-term saving.
- You can pay in up to your ISA limit per year (£20,000 for the 2020-2021 tax year).
- You must be 16 or over to open a cash ISA.
- There’s no tax to pay on any interest earned.
- Can be instant access or fixed term.
- Good for tax-free savings.
- Access varies.
- You must be resident in the UK to open an ISA.
- You can’t get a joint ISA account.
Children’s savings accounts
Children’s savings accounts are basically the same as adult accounts. If you’re looking to give your child a head start when they’re older, you can set up a standing order to make a regular deposit each month. Saving as little as £10 a month from when they’re born can provide them with a gift of £2,160 on their 18th birthday. When you consider the interest earned, this would be even more than that.
- They can be opened for any child under the age of 18
- The child can only use the account themselves from the age of seven
- Money gifted from parents, that earns interest (AER) over £100 a year, will be subject to tax
- Children have a personal allowance for income tax, which is £12,500 for the 2020/21 tax year. As long as any income and interest they earn doesn’t exceed the personal allowance, there will be no tax to pay.
Junior Individual Savings Accounts (JISA) are long-term, tax-free savings accounts for children. They are set up by parents or guardians who manage the account until the child turns 16, but the money belongs to the child. You currently can't compare these with us.
- You can pay in up to the child’s ISA limit per year (£9,000 for the 2020-2021 tax year).
- There’s no tax to pay on any interest earned.
- The money belongs to the child.
- They can only access the money when they turn 18.
- Good for saving for your child’s future.
An ISA aimed at younger people to help them save for a home or for retirement, with a special bonus paid by the Government to bump up the value of savings. (You currently can't compare these with us)
- Available if you’re aged 18-39.
- Pay in up to £4,000 per year until the age of 50. The Government will add an extra 25%.
- There’s no tax to pay on any interest earned.
- If you withdraw money early you pay a 25% penalty.
- Good for saving for later life, retirement or your first home.
- Access at age 60, when you buy your first home or if you’re terminally ill.
The Lifetime ISA limit of £4,000 counts towards your annual ISA limit. So you can hold a Lifetime ISA alongside a cash ISA, or stocks and shares ISA.
A notice account is a type of savings account which requires you to notify the provider before making a withdrawal. The advance notice period varies between providers. If you need to access your money sooner, there will usually be a penalty fee to pay.
- Can offer better AER rates than standard savings accounts
- You must notify your account provider before making a withdrawal
- This period can range anywhere between one and six months
- Withdrawing without the required notice period often results in a fee
- Limits to minimum balance, maximum withdrawals and more may apply
Why compare savings accounts?
When choosing a savings account, you want to get a good interest rate – along with the features you need to manage your finances. With so many providers out there, you have a lot of options to choose from to find the best savings account to suit your needs.
At Compare the Market, we make it easy to compare savings account rates by gathering information from dozens of accounts in one place. You can see the rates available and key information at a glance – including pros and cons, maximum and minimum balance, and the ways you can manage your account.
Do I have to pay tax on the interest my savings earn?
It depends on the type of savings account you have and how much you have 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 can earn some interest from their 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.
For more detail see tax on savings interest at GOV.UK.
Frequently asked questions
Who can open a savings account?
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 rules. There may be age restrictions, so you may have to be 16 or 18 for some types of account.
Some banks may restrict 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 are considering.
I have debts. Should I pay those off before I start saving?
If you have outstanding credit card debts where you’re paying high rates of interest, it may be advisable to pay those off first. That’s because typically, you pay a higher rate of interest on debts like loans and credit cards than you can earn in interest on savings. Once you have cleared your debts, you’ll have more money and can save faster.
If, on the other hand, you’re paying off your credit card in full every month and keeping up your mortgage payments, it can be a good time to start saving, says Anelda Knoesen from the Compare the Market money team.
How much should I be saving?
Start by making sure you have at least three months 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 £338** on your energy bills, £228*** on your car insurance and £104**** on home insurance by getting a better deal. That would give you nearly £670 to add to your savings in a year.
According to the Money Advice Service, it’s “a good idea to save up at least 10% of your earnings each month (or as much as 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.
**Where a saving can be achieved, 50% of people could achieve a saving of £338.00 on their dual fuel energy costs based on Compare the Market data in May 2020.
***Based on Online independent research by Consumer Intelligence during November 2020. 50% of customers could achieve this saving on their car insurance through Compare the Market.
****Based on online independent research by Consumer Intelligence during November 2020. 50% of customers could achieve this saving on their Buildings and Contents insurance through Compare the Market.
How does inflation affect my savings?
Inflation is a measure of how prices are rising or falling and what your money will buy for you. For example, if prices are rising, £100 will buy you less in real terms next year than it will this year. Inflation can reduce the value of your savings over time due to the fall in purchasing power.
During the ongoing COVID-19 pandemic, inflation has fallen sharply, settling at 0.2% in August 2020. If you’re not careful, then, your savings rate could easily be falling behind inflation – but if you compare rates you can find accounts that are currently beating inflation.
What are introductory bonus rates?
You might see some savings accounts offering high interest rates as incentives for new customers. But once the introductory period is up, you can 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 can mean you lose it – for example, if you withdraw money before the end of the introductory period.
Can I have more than one savings account?
Yes. You can have multiple accounts as long as you meet any requirements set by the account providers. This can 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 or different set periods and offers you a higher rate of interest.
You might also want to have savings accounts that you use in different ways. For example, a branch account where you can pop in and pay cheques into easily, but another account that you just manage online or on your phone.
But if you have multiple accounts you ideally need to keep an eye on all of them so you can move money to better paying accounts if the interest rates drop, or when fixed term arrangements come to an end.
Can I take my money out of a savings account whenever I want?
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 may not let you take your money out at all until the end of the period, while others will let you do so, but may charge you a heavy penalty.
How can I save for my children?
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. 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 to save regularly, giving them good financial habits for when they are older.
How do I open a savings account?
This may depend 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 for the account by post.
If you use our comparison tool, you can easily see what you need to do to open the account in the next steps box when you check details for the individual accounts.
What do you need to open a savings 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, particularly if you haven't banked with that provider before. If you want to open an ISA, you’ll need your National Insurance number.
How do I close a savings account?
This will depend on your account provider. You may be able to close some accounts online, while for others you may have to visit a branch. If you have a fixed-term savings product, it may be that you’re not 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.
I’ve already got a savings account. How often should I review it to see if it’s still right for me?
You should make sure on a regular basis that your money is still in the best account, says Anelda Knoesen of the Compare the Market money team. Interest rates can change, new accounts and even new banks become available, and your own personal circumstances may change.
Ideally you should review your options for non-fixed term savings accounts at least once a year, and if any of these things happen:
- bonus rates end
- your provider tells you they are reducing interest rates
- when you’ve saved enough to potentially allow you access to an account with a higher minimum deposit that could earn you more interest
- your tax circumstances change
- you have a joint account split with your partner
- fixed-rate deposits are coming to an end
- the Government makes changes to savings in the Budget
- any changes to the limits of the Financial Services Compensation Scheme are made
How can I be sure my savings are safe?
Make sure your savings are in an account that is protected by the Financial Services Compensation Scheme. 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.
How do savings accounts work?
Traditionally, banks have used 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 will have £1020.18 – 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:
|Year||Year’s interest (compounded monthly)||Total interest||Balance|
Banks can afford to pay interest because typically they charge higher rates to borrowers, than they pay to savers. If a bank charged the customer 5% interest to borrow the £100, the bank would earn £5, then pay part of that profit as interest to savers in return. Compounding also explains why, if you have a loan or debt, the longer you take to pay it off, the more you will pay in interest.
Savings accounts are offered by banks, building societies and credit unions, and can also be offered by friendly societies and other financial institutions.
What should you consider when you compare savings accounts?
- Interest rate – for the most part, people want to earn as much interest as possible on savings. But this often has to be weighed up against the benefit of having easier access to your money. For example, instant access usually means a lower interest, while fixed-term savings tend to offer more in interest.
- Access – some accounts give you instant access to your money whenever you need it. Others charge you a penalty if you withdraw money, or don’t give you access at all before the set end date.
- Tax – there are various accounts that help you earn tax-free interest on your savings (ISAs). But remember, with your personal savings allowance you won’t pay tax on the first £500 to £1,000 of interest accumulated anyway, depending on your tax band.
- Minimum and maximum deposit – some accounts can be opened with just £1, while others may need you to deposit much larger sums. Some savings accounts will also have a maximum balance. A number of accounts offer tiered rates of interest, so the amount of money you have in the account can affect your rate of interest.
- Protection – make sure your savings are protected by the Financial Services Compensation Scheme (FSCS), so you know you'll get your money back if the organisation fails. There's a limit of £85,000 per banking group, per eligible person. If you have more than £85,000 in savings and deposits, you should split it between different accounts and banks with different banking licences. Some international banks may be protected by their own country's scheme. You can check to see if your money will be protected by the FSCS.
Don't forget, if you've only got a small amount to save, some current accounts will pay higher rates of interest on balances up to a certain level – so those may be worth considering. But you'll need to be disciplined and make sure you don't spend the cash in your account. It might be worth opening a savings account, too.
Which type of savings account is best for me?
Only you can decide what account is best for you and your circumstances, but here are some of the main things you should consider when making your decision. It may be you need more than one savings account. For example, you might need an account where you can keep money to access quickly, plus an account to save money for your longer-term goals.
Here are some questions you should ask yourself when considering a new savings account, says Anelda Knoesen from the Compare the Market money team.
- How much money do you have to save? Some accounts pay different rates of interest depending on how much you save. Usually, the more you have, the higher the interest, so check out your options. But be aware of the £85,000 compensation limit mentioned earlier. If you have more than this in savings, you may want to spread your money around.
- Do you have a rainy day fund? The independent Money Advice Service says a good rule of thumb is to have around three months of ‘essential outgoings’ in an instant access savings account. Think about how much you spend every month on mortgage or rent, bills, food and other essentials, then multiply that by three. You should put your emergency fund money in an account where you can get hold of it quickly when you need it.
- Do you need access to your money? For the most part, easy access accounts let you make withdrawals when you want, but some may limit the total number of withdrawals you can make in a year. They tend to pay lower interest rates than other types of savings accounts.
- Can you put your cash away for longer? Fixed-rate accounts can pay higher interest in return for keeping your money in an account for a set period of time. If you take your money out sooner, there can be high penalties and you could miss out if interest rates rise during the savings term. You can save regularly into other kinds of accounts too, so weigh up your options.
- Do you want to add to your savings every month? Regular saver accounts are designed to let you save around £200 to £500 a month. The maximum you can save varies between providers. They can pay higher interest rates than regular accounts, but some only apply for a year and then you have to move your money elsewhere. Others will let you continue to build your funds.
- Do you pay tax on your interest? You never have to pay interest on savings in a cash ISA, so if you don’t have one it’s worth considering.
- Are you saving for a deposit as a first-time buyer? Consider opening a Lifetime ISA to earn a 25% bonus on your savings if you are a first-time buyer aged 18-39. You can’t use these savings for anything other than buying a house or for retirement at 60+ without paying a 25% withdrawal penalty.
- Do you want to save for your kids? If you have children under 18 you can save money for them. For example, with a junior ISA you can lock money away until they are 18 which they could then use to help pay for university, or as a deposit for a home.
- Is saving the best use of your money? Would you be better off paying off your debts or overpaying your mortgage? Remember, interest rates on debts and mortgages are usually higher than what you can earn on your savings.
- Do you have a particular savings goal? Are you saving for the holiday of a lifetime, a wedding, a deposit or a new car? You may want to separate these savings from other savings to help you see how close you are to your specific saving goal.
- How hands-on do you want to be? Some providers tempt savers in with a high bonus rate for a fixed period, which then drops significantly. If you’re confident that you’ll remember to switch accounts when the bonus rate falls, then choose one of these. If you don’t have time to keep switching, you may be better off choosing an account that offers a stable, decent rate of interest.