Top Savings Accounts

12 need-to-knows before you pick a savings account

What is a savings account? Basically, it's just a place to dunk cash to earn interest and save for the future. Some accounts are variable rates with easy access while others are fixed where access to your money is restricted. But don't just go for the headline screaming the highest rate without first examining how it works and what the alternatives are.

• Savings interest is now paid tax free

  It used to be that for every £100 interest earned, basic-rate taxpayers lost £20 in tax, higher rate £40. Yet since April 2016, the personal savings allowance (PSA) has turned it on its head. Now:

  • All savings interest is paid gross, ie, there'll be no tax taken off.
  • This works for ALL interest – not just savings accounts, but bank accounts, credit unions and peer-to-peer savings. However, share dividends aren't included.
  • Basic 20% rate taxpayers can earn £1,000/yr interest tax-free.
  • Higher 40% rate taxpayers can earn £500/yr interest tax-free.
  • Top 45% rate taxpayers don't get a PSA, so all interest is taxable.
  • Cash ISAs, Premium Bonds and other tax-free savings interest DON'T count towards the £1,000 (or £500) PSA limit so you can get this interest too.
  • If you earn interest over the limit, you pay tax at your income tax rate, but only on the amount over the limit.

  If you do then owe tax, it'll be taken through your tax code. If you self-assess, you'll declare anything you need to pay there. HMRC estimates the PSA will take 95% of people out of paying savings interest tax altogether. For full info and what to do if you'll earn over the limit see our how the personal savings allowance works guide.

• If you've costly debts, pay them off before saving

  If the interest cost of your debt is more than you'd earn on savings you're better off paying down the debt. If you've £1,000 on a credit card at 20% it costs £200 a year, assuming a constant balance. In savings at 2%, you'd earn £20 a year, so you'd be £180 a year better off repaying the card. Much more info in Should I Repay Debts With Savings?

  Quick questions

  What if I have a 0% card or a really low rate?

  Well, if your debt is free, the urgency isn't there to pay it off. But debt at 0% tends to have an end date.

  So long as you meet minimum payments, there's nothing wrong with saving while the debt is at 0% but then paying it off when the intro deal ends. This way, you'll have the best of both worlds – you'll have paid off the debt without paying any interest, plus you'll have earned interest on the savings while you had them.

  A low rate is different. You need to examine whether you're actually paying more interest on the debt than you're getting on the savings.

  Shouldn't I have an emergency fund?

  It is important to have access to an emergency fund in case the worst happens, but that doesn't mean you have to actually have a pot of cash. If you pay off an expensive credit card, then keep the card for emergencies.

  If nothing untoward happens then you never need to use the card, but if something goes wrong, then you could always use the card, and you'd be no worse off than had you not paid it off anyway.

  A practical example of why this works: Johnny Comelately

  Johnny Comelately currently has £5,000 saved up, earning 2% interest, in case of emergency, yet he also has £5,000 on credit cards at 18%. Thus while his savings are earning him £100 a year, his debts cost £900. Overall he is paying out £800 a year.

  Now compare what happens if he pays off his debts with his savings vs not doing so:

  Situation A: No emergency happens

  No change. Keeping both debts and savings costs Johnny £800 a year.

  Pay off debts with savings. Johnny now neither earns nor pays any interest, thus is relatively £800 a year better off, and all the new cash he puts aside can go towards genuinely saving.

  Situation B: After a year he has to pay £5,000 for an emergency roof fix

  No change. Johnny uses the savings for the emergency. This leaves him with no savings and £5,000 of credit card debt at 18%.

  Pay off debts with savings. As Johnny has no savings, he has to borrow the £5,000 on his credit cards. This leaves him with no savings and £5,000 debt on his credit card at 18%.

  In other words, Johnny is in exactly the same position in situation B, regardless of what he does. Yet before the emergency he was £800 a year better off by paying off his debts with his savings.

  So overall, whether an emergency happens or not, the best result is to pay off your debts with your savings. The only time to beware of this is if you're not assured of being able to reborrow the cash.

  Usually with credit cards it's fine, as they're a readily available source of credit, but if your debt is a personal loan, there's no guarantee you will be able to get another – in which case an emergency fund is sensible.

• If you've got a mortgage, check if you should overpay it before saving

  This is the same principle as above: if the mortgage rate is higher than the savings rate, and you can spare the cash, overpaying is a solid financial decision. However, there are possible complications, such as penalties for paying too much...

  Quick questions

  Will I always be allowed to overpay and is there a limit?

  Whether you can overpay your mortgage or not depends on your mortgage provider and the type of mortgage you've taken out.

  The vast majority of mortgages allow you to overpay, though there's usually a limit to how much you can overpay. Common limits are £10,000 a year or 10% of the value of your mortgage debt each year.

  It's also important to check how it plans to use your overpayment. Some lenders will use it to reduce the term of your mortgage, so your monthly payments stay the same but it'll be paid off quicker. Where the amount overpaid is small enough, others use it to reduce your next monthly payment, which only saves you a few days' interest.

  Always check how the mortgage lender plans to use your overpayment, and if possible, say you want it to reduce the balance, and keep your monthly payments the same to really see the benefit.

  Find full information on the pros and cons in the Should I Overpay my Mortgage? guide, or see how overpaying affects your mortgage with the Overpaying my Mortgage calculator.

  If I overpay my mortgage can I access that extra cash again?

  If you have an offset mortgage the ability to access those extra payments is usually part of the deal. An offset is where you build up savings to reduce/offset the amount of debt you pay interest on, so if you had a £100,000 mortgage and £20,000 in savings, you only pay interest on £80,000.

  On other types of mortgages, some flexible deals allow you to borrow back overpayments. However, this practice is far less common now for new mortgages. Check your mortgage terms carefully.

  One warning: just because you've overpaid doesn't automatically mean you'll be allowed to borrow the money back in all cases. Your mortgage lender will do checks on affordability so they comply with current lending criteria. For example, you might be turned down if they thought you'd struggle to make future contractual payments – they'd want to keep hold of as much of your money as they could in that case.

• Have you used your 2018/19 ISA allowance? It allows you to save and never pay tax on interest

  A cash ISA is simply a savings account where you never pay tax on the interest. Anyone aged 16 or over can put up to £20,000 into their cash ISA during the current tax year.

  Traditionally this was the first place for taxpayers to put a lump sum, yet the personal savings allowance has made them a less attractive option. Read is the cash ISA dead? for full analysis on whether or not you should open one.

  Quick questions

  Isn't my money locked away in an ISA? (That's a common myth – it's not)

  Just like savings accounts, there are different types of ISAs. One of the main types people opt for is an easy-access ISA. And, just like easy-access savings, the money's there for you to take it out whenever you like.

  Of course, you can get fixed-rate ISAs, where you put money in there for a number of years. But, unlike normal savings, even fixed-rate ISAs have to allow you access to your money, although all will charge an often hefty interest penalty if you do. Find out more about how ISAs work in the Full ISA Guide.

• Are you willing to switch bank account? You can boost savings rates

  Surprisingly, some banks' current accounts pay a higher rate of interest than their savings accounts – these are currently the top rates available, though many have cut their rates and perks in recent months. Unlike normal savings accounts, you'll need to pass a credit check.

  For a selection, see our top pick bank account section below, or for a full range of accounts, see the Best Bank Accounts guide.

• Can you put money aside each month? Consider a regular saver

  This is a specific product for putting £10-£500 in every month (maximum deposits vary by account). If you want to save more, combine a few. The main advantage is they tend to pay much higher rates of interest than standard deals. For more details and best buys, see the full Regular Savings Accounts guide.

• Find it hard to save or unsure what you can afford to put aside? Earn up to 5% with automatic savings

  Some apps (with your permission) can connect to your current account to determine how much you can afford to save each month. It's done automatically using clever algorithms, though some manual deposits are also permitted. You can currently earn up to 5% for a year, though there's no protection under the Financial Services Compensation Scheme (FSCS). For full details, see our App-based banking guide.

• Can you lock the cash away? Fixed-rate bonds give a (slightly) better return

  You may want to consider getting a fixed-rate bond – which is just a savings account where the amount you earn is set in stone over a fixed time period. However, you can't usually access the cash during that time, and even if you can, the penalties can be large.

  Usually fixed rates are higher than easy access, so they can be good deals. However, if normal savings rates were to increase during that time – and we are now in a position of rising rates – you'd be unable to ditch and switch to a better payer. See the full top fixed-rate bonds section.

• Up to £85,000 in savings per person is safe in UK-regulated accounts

  Ten years ago, we wouldn't have had to stress this so clearly. No bank had collapsed in 100 years, but then the credit crunch and global market turmoil hit. After the calamities that hit Northern Rock, RBS, the Lloyds group, Bradford & Bingley, Icesave and Kaupthing, every sensible saver should ask: "Is my money safe?"

  Provided the money is in a UK-regulated bank or building society, it's protected under the FSCS for up to £85,000 per person. Read more in the Are My Savings Safe? guide.

  Quick questions

  What counts as UK-regulated?

  To be UK-regulated, a savings or current account needs to be registered as a deposit taker with the UK regulator, the Financial Conduct Authority.

  Many banks are foreign-owned, such as Santander, which is owned by Spain's Banco Santander. However, Santander has UK headquarters and is authorised by UK regulators, so it is covered by the Financial Services Compensation Scheme.

  However, some banks that offer products in the UK are not headquartered here – and rely on another country's deposit compensation scheme. A good example of this is Triodos Bank, which sometimes offers decent rates on fixed savings. But it is headquartered in the Netherlands, so you'd be reliant on the Dutch government's compensation scheme if Triodos went bust.

  If you want to read more about how savings are protected, please read Are My Savings Safe?

• Ditch and switch after introductory 'bonus' rates end

  These are temporary interest boosts to attract new customers. They're actually a good thing for many, as they effectively act as a minimum rate guarantee during the introductory period, promising you at least some interest.

  But it is vital to remember the end date and switch as soon as the bonus ends, so you don't languish on a rubbish rate. Always know your account's exact name and the rate it pays as some try to flog you a similarly named deal at bonus-end.

• In a couple? Put savings in the name of the partner who pays less tax

  If one of you pays a lower rate of tax than the other, it's financially worth considering whose name you save in (but ONLY if you trust them). Put it in the lower rate taxpayer's name and it'll fall under a higher personal savings allowance, so you can save more without paying tax. There's nothing stopping married couples or civil partners moving money between them.

  If you're not married, there's no tax on giving your partner a 'gift' – though once the money goes across, be aware it becomes their cash, not yours. The only extra issue here would be inheritance tax. If the person who gave the cash dies within seven years the surviving partner may be charged tax.

• Got kids? Encourage them to start saving

  If you've got children aged under 18, then you could consider opening a specialist savings account for them. Though they tend to mirror adult accounts (in that you can get easy access, fixed rate, ISAs etc), some of the current rates actually beat their grown-up counterparts. Plus, it can be a great way to teach your kids the merits of saving early.

  You can gift enough savings per parent tax-free to earn £100 interest each year – though open a junior ISA and all interest is tax-free regardless, though the cash is locked away. Other children's savings options include Regular Savings, Easy-Access Savings and Fixed Savings.