- 95% of people won't pay tax on savings interest from 6 April
- Earn up to 6% TAX-FREE, if you sort your savings now
- Step-by-step guide to maximising the performance of every penny
Currently for every £100 interest earned, basic rate taxpayers lose £20 in tax, higher rate £40. Yet from 6 April the new personal savings allowance (PSA) means every basic (20%) rate taxpayer can earn £1,000 interest without paying tax on it, equivalent to the interest on £70,000 in the top easy-access savings account. Govt stats say 95% of people won't pay any savings tax.
This doesn't just apply to savings accounts, it's for ANY INTEREST such as from bank accounts, credit unions, building societies or even peer-to-peer lending. And it'll be automatic - from 6 April you'll be paid interest gross (ie, with no tax taken off).
Higher (40%) rate taxpayers get a £500 personal savings allowance, but additional (45%) taxpayers don't get any. Full info and what to do if you'll earn over the limit in our How the personal savings allowance works guide.
Most importantly, the PSA changes where you should put your money, and now's the right moment to start sorting it. Below I've updated our savings fountain which shows where every penny should flow to max interest.
The NEW Savings Fountain
For most people, the new personal savings allowance means tax is now not an issue, so to maximise interest pour your cash where you earn most. Think of it like a champagne fountain: once the first glass is full, it overflows to the next layer.
But before you start, do you have any debts? If so and the interest rates cost more than saving pays (I used to say 'more than you'll earn after tax' on savings but for most that's no longer relevant), you're likely better off clearing them. Pros & cons in my 3 guides - SHOULD I USE SAVINGS TO PAY OFF MY... 1) Debt? 2) Mortgage? 3) Student loan?
Here's my new, improved savings fountain order - ALL savings mentioned here have the full UK savings safety protection unless stated.
Please note, we updated the product info below on 22 March 2016.
1. TOP TIER: Help to Buy ISAs: 4% plus up to £3,000 bonus. Launched (for first-time buyers) in Dec, for anyone 16+ who's never owned a home and may want to, this is usually a no-brainer - not because of the interest, but because if you use it towards a mortgage deposit the state adds 25% on top, up to a max £3,000. Full FAQs & best buys in my Top Help to Buy ISAs guide.
And just this week we've seen the first people cashing in. Read Jason's story: "Just got £800 towards my deposit - very happy."
2. NEXT, FOR LUMP SUMS: 5% easy access via 'bank account' savings. A range of bank accounts offer super-high in-credit rates as loss leaders to entice banking customers to switch to them.
- Bigger savers: Santander 123* pays 3% on £3k-£20k. It has a £5/mth fee, but for many that's easily covered by the cashback if you pay bills via it. Even without that, and with the fee, it's the best easy-access deal if you've £7,000+ saved. Couples can have 3 accounts covering £60k (one each & a joint) if they meet eligibility terms.
- Smaller savers get higher rates and no fee: Club Lloyds* pays 4% on £4,000 to £5,000, Nationwide FlexDirect* is 5% on up to £2,500 for a year, TSB Classic Plus* 5% on up to £2,000 (and also gives up to £5/mth cashback on contactless card spending). If you've very small savings it's often better to just grab the £150 bank switching bonuses rather than interest.
To get these accounts (or to make them fee-free) you need to pass a credit check, meet their monthly min pay-in amounts & set up two direct debits. Full info incl eligibility criteria in Best Bank Accounts.
- Can I open more than one? Yes, see the 5% Savings Loophole.
3. TRICKLE CASH INTO REGULAR SAVINGS... Save monthly for up to 6%. Regular savings accounts can pay high interest but only on small amounts for a short time. They're great for, er, saving regularly, but you can also gradually trickle lump sums from a top savings account.
- Earn 6% with 'bank linked' regular savings. The top payers are all accounts you can only open if you have a specific current account. Luckily, the current accounts they're linked to all tend to be best buys.
Also all the top banks for smaller savers above (in point 2) have linked regular savers: Club Lloyds pays 4%, Nationwide & TSB 5%.
- Anyone can earn 3.05%. Leeds BS Regular Saver pays 3.05% AER variable for a year, if you pay in between £50 and £250 every month.
Full info in Top Regular Savings Accounts, which also mythbusts the common misunderstanding that "these don't pay the rates promised".
4. NOW IT'S TRICKSY CASH ISAs. Some should ditch 'em, for others there's a trick to fix at 2.6% but with access to your cash. For 17 years, the ISA's been the savings superhero - the only way to protect normal savings from the taxman. But now all savings will be tax-free.
So THIS IS WHERE THE NEW PSA CHANGES THINGS. What you do depends on how much you're saving and your tax rate. It's complex so I've written a full Is it time to ditch cash ISAs, now that all savings will be tax-free? guide to go through it step-by-step.
For those who they still work for, here are the top deals...
5. CAN YOU LOCK CASH AWAY? Earn 2.45% in fixed-rate savings. Are you prepared to save cash for a set time, where you can't withdraw any? If so, you can get a fixed rate that's usually higher. Yet it's worth first doing an ISA fix as they don't lock your cash away.
Also bear in mind if rates rise over the term you can't ditch & switch, so we don't list savings fixes longer than 3 years. Full options in Top Fixed-Rate Savings, in brief...
- Al Rayan Bank probably pays 2.17% over 18mths and 2.78% over 2yrs. I say 'probably' as it's Sharia compliant, and as Islam bars interest it's an 'expected profit rate' - it's never not paid out in full before, but by definition isn't certain. Anyone can open it, & it's fully UK savings safety protected.
- Fidor Bank pays 2.2% AER for 2yrs, and 2.45% for 3yrs. Though this DOESN'T have UK savings safety protection, it's German-protected to a similar amount (up to €100,000) so in the unlikely event it went bust you'd be reliant on the German govt to bail you out.
6. TOP BOG-STANDARD EASY ACCESS: Earn 1.31% - 1.45%. Here you can put in big amounts and withdraw cash at leisure. From April, interest will be tax-free too, but rates are lower than top easy-access ISAs now so if you haven't used those yet, fill them first.
- The top deal is Virgin at 1.31% (min £1). You may note many best buy tables list a higher payer, but they don’t always tell the full story...
- RCI Bank pays 1.45% AER variable, but this DOESN'T have UK savings safety protection, it's French-protected to a similar amount (up to €100,000), so in the unlikely even it went bust you'd be reliant on the French govt to bail you out. That’s not necessarily a problem but it is worth knowing before deciding.
As these are variable rates, they can change, so monitor regularly. Full options in Top Savings. If you've large sums, over £75k, consider spreading cash to keep it safe - see How safe are my savings?
This article first appeared in the weekly email on 10 February 2016. The product info was updated on 22 March 2016.