When the interest rate went up in November for the first time in ten years, mortgage rates rose overnight, but banks have been dragging their feet in raising savings rates. This has been frustrating for savers, but there is still hope.
You will still need to shop around for the best savings rates and deals, but our top tips could help you build your savings in today’s sometimes-difficult market.
Top tips for saving money
Savings interest is tax-free
It used to be that for every £100 in interest earned, you would have to pay 20% tax, or 40% if you were on a higher rate. But in April 2016, the Personal Savings Allowance (PSA) changed this.
Currently, all savings interest is paid gross, meaning there won’t be any tax deducted. This applies to all savings, not just savings accounts – so bank accounts, peer-to-peer investments, credit unions, and building society accounts are included. The only thing not included are share dividends.
The PSA is scaled much like tax, so lower earners (20% basic rate) can earn £1000 a year in interest before being taxed. Higher rate earners (40%) can earn £500 a year, and top earners (45% bracket) don’t get a PSA, so will be taxed on all interest earned.
Cash ISAs, premium bonds and other tax-free savings interest doesn’t count in the above scale, so these are tax free too. If you earn interest over and above the maximum, you’ll pay at your income tax rate, but you’ll only be taxed on the amount actually above the limit.
Do you put money away each month?
If you save a certain amount each month, it might be worth considering a regular savings account. This is a specific type of account for saving £10 to £500 each month - the maximum amount you can save will vary for different providers.
These accounts tend to have a better interest rate than standard current accounts, because you’re guaranteeing a certain amount of savings every month.
Read more about our deals on easy-access savings accounts which let you save anything from £1 to £10 million.
Have you used your ISA allowance?
You can save in an ISA and never pay any tax on your interest. The Cash ISA allowance for 2017/18 is £20,000 and anyone over 16 can have one.
Historically, these were the first ways of saving a big sum for younger generations, but with the arrival of the Personal Savings Allowance, ISAs might now be less attractive than they used to be.
However, they’re a good idea if you’ve reached your PSA limit, or if you’re in the highest tax bracket (if you are in this bracket then you still get 100% of your interest with an ISA, rather than only 55%).
Check out our exclusive deal with the Post Office on a Cash ISA
Fixed-rate bonds are good for saving as you will be penalised for taking the cash out
When you take out a fixed-rate bond – a savings account where the amount you earn in interest is set over a fixed term – you can’t get access to the cash during that time. Even if you could, then you’ll normally have to pay a fairly substantial penalty.
Because the rate is normally higher than easy access accounts, you can usually find a good deal. But bear in mind that if saving rates generally start to rise, then you won’t be able to change to a better rate until your specified fixed term is over.
For a leading deal on a five-year fixed-rate Cash ISA, consider this high-interest offer from 1st Coventry.
Boost saving rates with a current account
If you’re willing to change current accounts, then you may be able to get yourself a decent interest rate. You could, for example, keep some of your savings in a current account offering a competitive rate, but you’ll need to be very conscious of not spending the money as normal.
Many of these accounts also have criteria like paying in a certain amount each month – so check this carefully and make sure you can meet the criteria before you open the account.
The highest interest return you’ll get on a current account with MoneySuperMarket deals is TSB on 3% (on balances up to £1500), but there are lots of options on our dedicated current account page.
Pay your debt off before saving
If the interest rate on your debt is higher than the earnings you would make on savings interest, then it’s definitely worth paying off that debt, or at least making a dent in it, before you start trying to save.
For example, if you have a credit card balance of £1500 at 10% APR then you are paying back £150 a year – assuming your balance doesn’t change. However, if you had the same amount in savings earning a rate of 2% interest, then you would make £75 a year.
Check if you should overpay on your mortgage before saving
Similarly, if your mortgage rate is higher than the saving rate, it might be worth overpaying on your mortgage.
Before you try to overpay, it’s worth getting in touch with your lender to find out if overpayments are allowed, and what penalties, if any, you might have to pay.
Switch after introductory offers and rates have expired
Many providers offer tempting introductory rates and bonuses on savings accounts to tempt new customers. These offers only last a certain amount of time, and then usually revert back to a low rate. For example, an account might be introduced with a 5% interest rate but after a year revert back to 1%. So, keep an eye on your rate and make sure you switch at the end of any introductory period, so you can make sure you’re getting a good deal.
Don’t feel you need to stay loyal to your bank. Loyalty to a bank is rarely rewarded these days, so don’t be afraid to move your money elsewhere if you can get a better deal.
Encourage your kids to save from a young age
It’s sensible to start saving from a young age, because the interest accrued has more time to develop into a decent amount. For instance, if you choose a Junior ISA (created in 2011) then parents, relatives and friends can invest up to £4,128 a year, and the money grows tax-free until the child is 18.
The great thing about children’s accounts is the high rates of interest on offer, to entice future generations to start a savings habit at a young age. Plus, the account can provide a good starting point towards extra education, a home or a first car when they’re 18.
For a good look at savings for kids, check out our dedicated guide page for Junior ISAs.