How to find the best high interest savings account
Seeking out high savings rates can be tricky. Here’s how to compare accounts and make the most of your money
Putting your savings into a high interest account means your nest egg will grow faster, bringing you closer to your savings goals. But with many different accounts on the market – and some having extra features or conditions attached - it’s not always clear which deal will suit you best. There are also tax implications to consider. Our guide covers the different types of account and what to look out for when choosing a new deal.
What is the best type of high interest savings account?
There are many different types of high interest savings account. But most of them are based on a simple trade-off: to get the highest APR or interest rates typically you’ll have to agree to lock up your cash for a longer period. For example, you’ll tend to get a better rate of interest on a five-year fixed rate bond – where you can’t access your money for the five-year term, compared to a savings account that gives you instant access to withdraw some or all of your savings whenever you like.
Think carefully about your priorities when choosing an account. After all, it’s hard to predict when an emergency might come up and you’ll need to use your savings.
These are the main types of savings account:
Easy access savings accounts. These accounts work a lot like an ordinary bank account – they let you make withdrawals whenever and wherever you want. Typically interest rates will be low, so your savings won’t grow as fast
Notice savings accounts. With these accounts it’s usually a bit harder to get your money – you’ll have to let the bank know when you want to make a withdrawal, usually 30 days in advance. But you’ll be rewarded with more generous interest rates
Fixed rate savings accounts. Savers agree to lock money away for up to five years with a guaranteed interest rate. The bank knows it has access to your money for a fixed term, and it can use it for long-term investments, so it can pay more in interest. Just keep in mind that if you need your money before the term is up, you’ll often have to pay a penalty fee
Regular saver accounts. These accounts typically last for 12 months and offer higher interest rates – but only if you commit to putting in a minimum amount each month. Typically you won’t be able to access the cash until the one-year term ends. It’s a great way to build up a savings pot but it won’t suit everyone as there’s usually a limit to how much you can save every month – sometimes as little as £50
Cash ISAs. This is short for Individual Savings Account. It’s a special type of savings account that lets you put away up to £20,000 a year tax free. ISAs can be either easy access or fixed rate
How to choose the best high interest account for you
The best high interest savings account for you will depend on how much you want to save, what you’re saving towards and whether you’ll need easy access to your money. There are a range of things to consider when choosing an account. But it can be helpful to think about what you’re saving for:
If you’re saving for a specific purchase in the short-term, such as a holiday or Christmas, an easy access account could be the best option. These accounts will sometimes pay interest monthly rather than annually, so your money will grow even if you’re only saving for a few months
If you’re saving for a major goal – a house deposit, car or wedding, for example – you could consider a fixed rate account. If you’ve got more time to save and you won’t need to touch the money, it makes sense to seek out a higher fixed rate to boost your return
If you’re saving for the long term, it might be worth looking at an ISA. You can save up to £20,000 each tax year in this tax free wrapper. You can also transfer between Isa providers (subject to your account’s terms and conditions) to take advantage of new deals and interest rates. Lifetime Isas can also be a good way to save for a first home purchase or for old age
If you’re just getting started with saving a regular saver account could kickstart a savings habit but you’re not committing to locking your money away long term
How much can I save in high interest accounts?
Most savings accounts will have a maximum amount you’re allowed to save to earn the advertised interest rate. But this limit can be high with plenty of accounts accepting deposits of up to £1 million or more. For many savers the bigger question is how much you can save before you start paying tax on the interest earned.
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 earning £50,000 or less can earn £1,000 in interest on their savings before they start paying tax
Higher rate taxpayers earning more than £50,000 get their first £500 of interest tax-free
Additional rate taxpayers earning £150,000 or more don’t get any personal savings allowance
To avoid paying any tax on your savings you can use an ISA. All interest paid on cash Isa deposits is tax-free – and this if for savings of up to £20,000 per tax year.
How much interest can I earn?
The interest rates paid by banks on their savings accounts are influenced by the Base Rate, which is the interest rate set by the Bank of England. The Base Rate is the rate of interest high street banks pay when they borrow money from the government.
The Bank of England meets every six weeks to decide whether to change the Base Rate, and they can move it up or down, depending on a range of wider factors, to help consumers, businesses and the wider economy. The UK has been in a very low interest rate environment for many years as a way of protecting businesses and borrowers from high debt repayments, for example. But this means savings rates are low.
As a general guideline, if you had £1,000 on deposit in an easy access account and £1,000 in a fixed rate account over five years, with a typical easy access account (at a competitive annual rate of 0.6%) you would earn £30 in interest in total over five years – this is using a compound interest calculation where the interest is added to the account each year and you then earn interest on the full amount. In contrast with a five-year fixed rate account at an annual interest rate of 1.5%, for example, you could earn up to £78 in interest (compounded) after five years.
Regular savings accounts work in a slightly different way, only typically allowing a maximum £250 to be saved each month. If you were to save £25 per month over five years you would earn, typically, around £38 in interest over five years. This is at an assumed rate of 1% per year. In total at the end of five years you would have £1,538 on deposit. In some cases it is possible to earn a higher rate on regular savings accounts – for example some savings providers will pay better rates to existing customers.
MoneySuperMarket’s savings calculator can show you how your savings would grow at different interest rates.
What are introductory bonus rates?
Some savings accounts come with an introductory bonus rate – a special interest rate that only lasts for the first few months after you open your account. Banks use these to attract new customers, and if you’re a canny shopper they can boost your savings.
Keep in mind, though, that once the bonus period ends, you’ll be moved down to the bank’s ordinary rate – which could be quite a bit lower. It could be a good idea to move your savings to a new account and take advantage of another introductory rate. Just make sure you read the small print first as there might be extra fees to do so, or penalties and loss of interest if you want to switch away.
Are my savings safe?
When you put your money in a savings account with a FCA (Financial Conduct Authority) regulated bank, building society or savings provider it will be protected by the Financial Services Compensation Scheme. This means that if the bank or provider goes bust, the government will step in to make sure you get your money back.
But the FSCS only guarantees savings up to £85,000 per person – or £170,000 for joint accounts – per financial institution. So if you have more than that in savings with one banking group you should think about spreading your money across multiple banks or providers to ensure your cash is fully protected. Remember too that some brands or providers are part of the same banking group – such as Bank of Scotland and Halifax – so your £85,000 cover would only apply to the banking group not both brands.
Be aware that some banks offer services to customers in the UK, but they aren’t regulated by the FCA – which means they aren’t part of the FSCS scheme. When you compare savings accounts with MoneySuperMarket, we’ll only show you accounts that are fully backed by the FSCS.
Is it worth getting a high interest savings account?
Whether saving in a high interest savings account is worth it will depend on your financial situation and priorities. Savings rates have been historically low for more than a decade so your interest-earning potential on your cash is reduced – even in the best paying accounts.
That said, it is possible to find better returns on your cash by regularly checking savings rates and moving or transferring your accounts to take advantage of competitive deals.
Still frustrated by low savings rates? You could consider taking more risk with your money and investing in an account linked to the stock market. For example, a stocks and shares Isa offers the potential to see your money grow faster as stock market performance rises. But be aware this comes with extra risk. Cash invested in any stock market-linked account is at risk and can also fall in value – meaning you could end up with less in your account that you put in. This happens when the stock market falls.
Compare savings accounts with MoneySuperMarket
It’s quick and simple to compare savings accounts with us. Our filters let you sort results so you can see a range of easy access, fixed rates and cash Isas and compare rates, deposit limits and any important terms and conditions.
Once you’ve found an account that suits your needs simply click through to the provider to get your account set up.