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What is a High Interest or High Yield Savings Account?

Victoria Russell
Written by  Victoria Russell
5 min read
Updated: 01 Mar 2024

Seeking out high savings rates can be tricky. Here’s how to compare accounts and make the most of your money

In a world where every penny counts. High-interest savings accounts emerge as a beacon of hope, promising higher returns than their standard counterparts. But what exactly are these accounts, and how can you make the most of them?

What is a high-interest savings account?

A high-interest savings account is not your average piggy bank. It's a special type of account offered by banks and building societies that rewards you with a more attractive rate of return compared to the more common current or easy-access savings accounts. However, the catch is often in the details—conditions such as maintaining a high minimum deposit or adhering to a notice period for withdrawals are common.

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The mechanics of high-yield savings accounts

Understanding how high-yield savings accounts operate is crucial to maximising your financial gains. Here's a breakdown of their workings:

  • How they work: Your money isn't just sitting idle; it's working for you, accruing interest over time. The longer you leave it untouched, the more substantial the returns.

  • The interest rate: This is the heart of the account, set by the provider and can vary widely. It pays to shop around to secure the best possible rate.

  • Withdrawals: Need your cash back? Make sure to follow the provider's instructions, as there might be charges for dipping into your funds too soon.

  • Minimum deposit: To kickstart your savings journey, an initial deposit is often required, and this amount varies from provider to provider.

Selecting the best high-yield savings account

There are a range of things to consider when choosing an account:

  • Interest rate: The higher, the better, as it directly impacts your potential earnings.

  • Bonus rate: Some accounts offer a tempting introductory rate. Keep an eye on these and be ready to switch when the rate drops.

  • Minimum or maximum deposits: These requirements can shape which account suits you best.

  • Notice period: How soon might you need access to your funds? Early withdrawal can come with a cost.

  • Fees, charges, and restrictions: Always balance any additional costs against the interest you're set to earn.

Understanding deposit limits

High-yield savings accounts often come with a ceiling on deposits to earn the advertised rate, which can be a lofty sum, sometimes exceeding £1 million. Remember, how you save can have tax implications based on your personal savings allowance.

Tax-free interest

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.

To sidestep the taxman entirely, consider using an ISA. Interest earned on cash ISA deposits remains tax-free, and you're allowed up to £20,000 per tax year. Utilise our savings calculator to strategise your savings goals.

Weighing the pros and cons

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 bet compared to the unpredictability of stock-market investments.

  • 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.

The safety net for your savings

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?

Determining if a high-interest savings account suits your financial landscape is a personal decision. With interest rates on the rise in the UK, these accounts are becoming more attractive. Regularly reviewing rates and transferring funds can lead to better returns. 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.

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