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Bank savings loophole

bank savings loophole

It's a twist from tradition but a few current accounts, in their yearning to get you to switch, pay decent savings interest as loss leaders (though most rates aren't as good as they used to be). But take advantage and you could still earn up to 5%. If you've a large amount of cash to save, a couple with £79,000 can combine accounts to average just over 2% – almost double the standard easy-access account rate available now, and four times the Bank of England base rate.

How come banks are offering these rates? They're basically offering them as loss leaders – ie, products that are discounted to draw in new customers – to get you to switch to them. But the accounts in this guide don't require you to actually do that – you just need to open them and comply with the conditions to get interest paid.

Some accounts make it harder than others, though. Most require you to set up direct debits, and credit them with a minimum monthly payment (which differs on each account).

OK, so I can just boost my savings? Yes, for the simple route, you can just open one of the accounts below that pays you the most interest based on your balance. But to really max the gains, you need to read this whole guide.

For comparison, the top easy-access savings deal open to all pays just 1.31%.
TABLE_CELL_STYLE In-credit interest (AER) Max
interest /yr (a)
Must have direct debit? (b) Min monthly pay-in How many can you have?
Santander 123* (c) 1.5% on up to £20,000 £238 (after fee) Yes, min 2 £500 (j) 2 (1 must be joint)
Bank of Scotland 2% on up to £5,000 £99 Yes, min 2 £1,000 (i) 3
Nationwide FlexDirect 5% on up to £2,500 for 1yr (d) £122 (yr1) No £1,000 (i) 2 (1 must be joint)
TSB Classic Plus* 3% on up to £1,500 (e) £44 No (e) £500 (i) 2 (1 must be joint)
Tesco Bank 3% on up to £3,000 £88 Yes, min 3 (g) £750 (j) 2 (h)
Club Lloyds 2% on up to £5,000 £99 Yes, min 2 £1,500 (i) 2 (1 must be joint)
Halifax £3/mth (f) £36 Yes, min 2 £750 (i) 2 (1 must be joint)
(a) Before any tax, if you always held the max balance. (b) Can't usually be to another account of yours. (c) £5/mth fee, but pays cashback on bills that for most more than covers it. (d) 1% after. (e) Must register for online banking. (f) Paid regardless of balance, as long as you're in credit. (g) Direct debits to Tesco saving accounts won't count. (h) If you have an old Clubcard Plus savings account you'll only be allowed to get 1 account. FULL info: Best Bank Accounts. (i) Pay-in has to be made once per calendar month. (j) Pay-in has to be made once per statement period (calculated from date of account opening). FULL info: What's the catch?

Hang on, you said I don't have to actually change my bank account. How would that work? It really is possible without switching, though some accounts require you to get a bit crafty. While a few of the accounts above let you earn interest without any direct debits set up, most require you to set up a couple that get paid out every month (and no, you can't usually just pay these to another of your bank accounts) which makes life difficult. So, let's start with the easy ones...

TSB Classic Plus* and Nationwide FlexDirect just require you to pay in £500 and £1,000 a month, respectively. And this means you could effectively use them as savings accounts. 

To do that, just fill the account with your savings up to the limit where you get the high interest, then set up a standing order for the key amount from your existing bank account each month. Then the next day, use another standing order from the savings account back to your main bank account. That way, you never miss a payment, and you're quids in.

To really max the interest you can earn, you might want to look at accounts that do require direct debits. Club Lloyds and Bank of Scotland require two to be paid out every month, Tesco Bank needs three paid out each month, while Santander 123* needs you to have two 'active' direct debits, though these don't necessarily need to pay something out every month.

OK, that's exciting. But I've more to save – any way to max it? Yes indeedy, but it takes a bit of standing-order scheduling to make it work. Though once it's set up, it's an automated process so should be fine.

These top deals allow you to open more than one account per person (some must be joint), and you can use more than one bank. That means you could massively up the amount you can earn.

So let's imagine you're a couple and you want to save
£5,000 each in two Club Lloydsaccounts, £5,000 each in three Bank of Scotland accounts, £2,500 each in two Nationwide FlexDirect accounts, £3,000 each in two Tesco Bank accounts, £1,500 each in two TSB Classic Plus* accounts and £20,000 each in two Santander 123* accounts – doing so would earn 2.02% on £79,000.

Fill all these accounts with the max savings and then, to get around the minimum pay-in rules, set up standing orders to cycle cash through the accounts to earn interest.

Here's one example of how you could play the system by moving just £1,500 about:

  • Day 1: Set up a standing order of £1,500 from your main current account to the first Club Lloyds account.

  • Day 2: Set up standing orders from the Club Lloyds account of £1,000 to the first Bank of Scotland account and £500 to the first TSB account.

  • Day 3: Set up standing orders of £1,000 from the first Bank of Scotland account to the first Nationwide account and £500 from the first TSB account to the first Santander account.

  • Day 4: Set up standing orders of £1,000 from the first Nationwide account to the second Bank of Scotland account and £500 from the first Santander account to the second TSB account.

  • Day 5: Set up standing orders of £1,000 from the second Bank of Scotland account to the second Nationwide account and £500 from the second TSB account to the second Santander account.

  • Day 6: Set up a standing order of £1,000 from the second Nationwide account to the third Bank of Scotland account.

  • Day 7: Set up standing orders to the second Club Lloyds account, of £1,000 from the third Bank of Scotland account and £500 from the second Santander account.

  • Day 8: Set up standing orders from the second Club Lloyds account of £750 each to the first and second Tesco Bank accounts.

  • Day 9: Set up a standing order of £750 from each Tesco Bank account back to your main current account.

  • Ongoing: Once all the standing orders have been set up, the money cycle should maintain itself; check it periodically to make sure that everything's in working order.

In total, you could earn more than 2% on up to £79,000 of savings. That's a tasty sum you can max the interest on.

I don't have enough direct debits to open all these accounts – how can I meet the minimum requirements? Good question. Firstly it's a good idea to check if you've any regular payments such as utility bills or subscriptions that could be paid by direct debit that you're currently paying manually – these are an easy way to meet some of the requirements without costing you more. Don't forget that if you've one or more credit cards you can also set up direct debits to pay them off each month (something you should do anyway).

If you've exhausted all these and still find yourself needing to make up a direct debit shortfall, we've a couple of ways to set up extras:

  1. Get a savings account that allows direct debits. A clever trick that a few of our forumites use to hit their direct debit requirements is opening savings accounts that allow you to fund them with monthly direct debits. An example is Scottish Widows' Internet Saver Account.

  2. Set up charity direct debits. While it technically would eat into your profits, another option (which would also benefit others) is to set up direct debits to various charities. Some allow you to donate as little as £1 per month; these include Marie CurieOxfamRNIBRSPCAShelter and Unicef. Of course, charities have costs associated with processing direct debits, so make sure you won't be leaving them out of pocket.

This savings malarkey sounds great, but what's the catch? Although you may think a month means a calendar month, that's not the case for every bank account. The Nationwide*Bank of Scotland and TSB* accounts in the table above define a month as a calendar month – yet you won't find that information in their terms and conditions. Halifaxand Lloyds also define it as a calendar month.

However, Santander* and Tesco Bank define a month as the statement period – calculated from the date you open your account. This means every customer will have a different statement period month.

Be sure you know how your bank account defines a month, otherwise you could lose interest or be hit with the monthly charge for the account if you miss a pay-in.

Isn't there a mark on my credit report when I apply for a new account? Good point. Whenever you open a bank account, a credit search is done, and opening loads of accounts can leave a mark on your credit history. So beware doing this if you've a big credit application coming soon, such as a mortgage.

You're also marked down a little if the average age of your accounts isn't very long – lenders like to see stability, and having many bank accounts open for a short period of time doesn't project that image. But, on its own, it's unlikely to be the difference between acceptance and rejection.

See Credit Scores for more info on what affects your creditworthiness.

I've heard that I no longer pay tax on my savings interest. How will this loophole affect tax? You're sort of right. The personal savings allowance (PSA) means every basic-rate taxpayer can earn £1,000 in savings interest each year without paying tax (£500 for higher-rate taxpayers, nothing for additional-raters).

This savings loophole lets you save up to £79,000 at about 2%. If you follow our instructions above to the letter, four of the accounts you open will be joint (the rest will be in your name) – and interest paid to joint accounts is split down the middle, so half would count towards your PSA (and half to the other account holder's).

So with all the accounts above, between you you'd earn just over £1,600 interest a year (£1,320 of which would count towards your PSA and £280 towards the second account holder's). This means you'd pay tax on a lot of your savings, so you may want to split the accounts between you a little more evenly (unless your partner's also doing the savings loophole too).