As of today, November 1, 2016, Santander is halving the amount of interest customers can earn on its 123 current account.

Previously, the popular account paid a tiered rate of interest, depending on the balance of your account.

You could earn 1.00% AER (variable) on balances of between £1,000 and £1,999.99, 2.00% AER (variable) on balances of between £2,000 and £2,999.99 and 3.00% AER (variable) on balances of between £3,000 and £20,000.

But as of November 1, the amount of interest you can earn on the 123 current account has been cut to a single monthly interest rate of 1.50% AER (variable) on all balances up to £20,000.

The amount of cashback you can earn on the account (between 1.00% and 3.00%) remains unchanged.

Disappointing news for savers

The Spanish bank blames the rate reduction on “the market expectation of interest rates staying lower for longer, compounded by increased costs brought about by changes in the banking industry.”

But the news is clearly a major blow to those who use the account to boost their savings income and who will see the maximum amount of interest they can earn halved to £300 a year.

It is the second time this year that Santander has made changes to the 123 account – back in January it increased the monthly fee on the account to £5, from £2.

Is it time to switch accounts?

With the Base Rate now standing at just 0.25%, many banks are cutting the rates paid on their savings accounts.

This means that although the news from Santander is frustrating, the account still remains competitive – especially if you keep a large balance in your account.

Kevin Mountford, head of banking at MoneySuperMarket, said: “Even when cutting the interest in half from 3% to 1.50%, the account still beats the current leading online easy access savings accounts.

“Unless customers are willing to commit their savings to a fixed term bond or explore alternative investment platforms such as peer-to-peer, Santander will still remain a competitive offering.” 

However, if you keep a smaller balance in your account, there may be better alternatives.

Nationwide’s FlexDirect current account, for example, pays 5.00% AER fixed for 12 months on balances of up to £2,500. After 12 months, the rate falls to 1.00% AER (variable). You must pay in at least £1,000 each month to qualify.

And Tesco Bank's current account pays 3.00% AER (variable) on balances up to £3,000.

However, several other banks have also announced they will be reducing rates on their current accounts in the new year.

TSB’s Classic Plus current account currently pays 5.00% AER (variable) on balances of up to £2,000. You must pay in £500 a month and register for internet banking, paperless statements and paperless correspondence to be eligible.

But from January 4, 2017, the account will pay 3.00% AER (variable) and only on balances of up to £1,500.

You can also earn 5% contactless cashback on your first £100 of contactless or Apple Pay payments every month until September 30, 2017 (or December 31, 2016 if you opened your account before June).

And if you switch to the account through MoneySuperMarket you can earn £100 cashback - you'll need to apply by December 11, 2016 and have completed the switch by December 30, 2016. You must also transfer all active credits and debits, which needs to include at least two active direct debits, and pay in £500 within 28 days of switching.

Meanwhile, the Lloyds Bank Club Lloyds current account pays 4.00% AER (variable) on balances between £4,000 and £5,000, or 2.00% AER (variable) on balances between £2,000 and £3,999.99 and 1.00% AER (variable) on balances of between £1 and £1,999.99.

But from January 8, the tiered structure will be replaced with a flat interest rate of 2.00% AER (variable) on balances up to £5,000.

There is a £5 monthly fee, but this is waived if you pay £1,500 or more into your account each month, and this will be cut to £3 in January. You will need to have at least two direct debits on the account.

The Halifax Reward current account is also changing in February. At the moment you can earn a £5 reward each month you pay in £750 or more, pay out two direct debits and stay in credit. But in the new year, the reward will be reduced to £3 a month.

Use your overdraft? You’ll be affected too

Santander has also announced it will be increasing the fees on its overdraft facility on the 123 account and the Everyday account, so if you regularly dip into the red, you could also be hit hard.

From January 9, 2017, you’ll be charged £1 a day on arranged overdrafts up to £2,000 (no change), £2 a day on arranged overdrafts of between £2,000 and £2,999.99 (up from £1 a day), and £3 a day on arranged overdrafts of £3,000 and above (up from £1 a day).

The £12 overdraft buffer will still be in place, and the monthly fee cap will remain at £95.

It could therefore be worth looking around for a better deal.

Nationwide’s FlexDirect current account, for example, offers a fee-free overdraft for 12 months.

Once the 12 months are up you’ll be charged 50p a day on arranged overdrafts over £10 (the first £10 of your overdraft is free), but this still works out cheaper than the Santander accounts. (Overdrafts are subject to status and approval.)

You can compare more accounts here.

Please note: any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct.