What is a high interest savings account?
A high-interest savings account makes your money work harder and pays a higher return than a standard savings account. Here’s how to compare accounts and make the most of your money.
Key takeaways
High-interest savings accounts offer better returns than standard accounts
Interest rates vary and there may be limits on when you can withdraw your money
FCA-regulated accounts are protected by the Financial Services Compensation Scheme (FSCS)
What is a high-interest savings account?
A high-interest savings account is an account paying a market-leading rate of return. It will pay out more in interest than a basic savings account or an easy-access savings account. This means you will earn more money – in interest – by choosing one of these accounts.
However, there may be limits on when you can access your money, or you might have to put in a set amount to open the account.
How high-interest savings accounts work
Here are some of the key points around high-interest savings accounts to help you choose the best one:
The interest rate: This is the amount of money your cash will earn while the account is open. It may be fixed so that it stays the same for a set period of time, or it may drop after an initial introductory period.
Withdrawals: Need your cash back? There may be penalties for accessing your money early.
Minimum deposit: An initial deposit is often required, and this amount varies from provider to provider.
How to choose the best high-yield savings account
There are a range of things to consider when choosing an account:
The higher, the better, as it directly impacts your potential earnings.
Some accounts offer a tempting introductory rate. Keep an eye on these and be ready to switch when the rate drops.
This is the amount of money required to be put into an account before you can open it.
How soon might you need access to your funds? Early withdrawal can come with a penalty.
Always balance any additional costs against the interest you're set to earn.
Make sure you’re comfortable with how you can open and manage the account. You can usually choose from an app, online, or branch-managed account.
Choosing a high-interest savings account
Interest rate
Bonus rate
Minimum or maximum deposits
Notice period
Fees, charges, and restrictions
Access
How do you open a high-interest savings account?
Once you’ve chosen an account, the process for opening works the same as with a standard savings account. You will usually need to give some details, such as your name, address and current account details, and you may have to deposit a minimum amount into the account.
How much tax will I pay?
The government considers interest on your savings as a kind of income, and it’s subject to tax. But UK taxpayers each get an annual personal savings allowance – that’s the amount of interest you can make on your savings without having to pay tax on it. The size of your allowance depends on your income:
Basic rate taxpayers: Enjoy £1,000 of interest tax-free
Higher rate taxpayers: Have a £500 tax-free interest allowance.
Additional rate taxpayers: Do not benefit from a personal savings allowance.
There are also cash ISAs to consider, which are tax free savings products. Interest earned on cash ISA deposits remains tax-free, and you're allowed up to £20,000 per tax year. Our savings calculator has more details.
The pros and cons of a high-interest savings account
High-yield savings accounts come with their own set of advantages and disadvantages:
Advantages:
Interest rate: They typically offer a more generous rate than standard accounts.
Less risk: These accounts are a safer than investing in the stock market
Help achieve savings goals: The higher interest rates can significantly boost your savings over time.
Disadvantages:
Withdrawal limits: Access to your funds can be limited by notice periods.
Requirements: Some accounts come with strict criteria and hefty minimum deposits.
Inflation: The value of your savings could be undermined by inflation over the long term.
Are high-interest savings account safe?
When you put your money in a high-interest savings account with an Financial Conduct Authority (FCA) regulated bank, building society or savings provider it will be protected by the Financial Services Compensation Scheme (FSCS).
This means up to £85,000 per person or £170,000 for joint accounts is safe, even if the provider goes bust.
Is a high-interest savings account right for you?
Over the last few years interest rates have soared on savings accounts, following successive rate rises by the Bank of England. If you have money to put away in one, choosing a high interest savings account can be a great way to grow your savings.
For those willing to embrace more risk, a stocks and shares ISA might be an appealing alternative, offering the chance for higher growth tied to stock market performance.
How to find our best high-interest savings accounts
Comparison sites like MoneySuperMarket are invaluable tools in the hunt for the perfect high-interest savings account. With the landscape of interest rates evolving, these accounts are gaining appeal. You'll find both fixed and variable rate accounts to choose from, each with their own set of benefits.
Additional resources for savvy savers
To further your savings knowledge, consider exploring these useful guides:
Simplifying savings account comparison
MoneySuperMarket takes the hard work out of finding your next savings account by finding great deals from our panel of providers. Just enter your deposit amount and compare deals by the interest rate offered to find the best fit for your financial future.
