A savings account is somewhere you can put your spare cash and earn interest, quite different to a business or personal account used for day to transactions. You can apply for a savings account with most banks, building societies and online savings providers.
If you’re thinking of opening a savings account first think about your goals - what are you saving for and when do you need to access the money? Then once you've decided which type of account suits you best, don't forget to compare between banks too.
How does a savings account work?
Each savings account has an interest rate, which tells you how much you will make on your savings over time.
You have a personal savings allowance that lets you earn a certain amount of interest on your savings before you need to pay any tax, so if you are a:
- Basic rate taxpayer you can earn £1,000 worth of interest before paying tax
- Higher rate taxpayer you can earn £500 worth of interest before paying tax
- Additional rate taxpayer you do not qualify for a personal savings allowance
Any interest you earn above your personal savings allowance will have tax deducted at the following rates:
- Basic rate – 20%
- Higher rate – 40%
- Additional rate – 45%
When you see a savings interest rate, it could be shown as either:
- Gross interest: the interest rate before tax is deducted.
- Net interest: the interest rate you get after tax is deducted (using the 20% basic rate tax).
Some savings accounts are completely tax free; they are called ISAs. ISAs are only available as sole savings accounts, meaning you cannot have more than one person named on the account. We will look at the different types of savings accounts shortly.
Who can open a savings account?
Almost anyone can open a savings account as long as you’re a UK resident. It can be opened in a branch, online or through the post.
They are mainly designed for adults, but there is also a selection of accounts for children under 16.
What are the different types?
Five of the most popular types of savings account are as follows:
1. Easy access savings accounts (also known as instant access savings accounts)
Ideal for: Emergency funds
You can often open one of these accounts online in under five minutes with as little as £1. You can deposit as much cash as you like and withdraw it whenever you want,without having to pay any fees or charges. Many of these accounts also come with a bank card you can use to make ATM withdrawals and pay for purchases.
2. Notice savings accounts
Ideal for: Saving for a specific goal e.g. dream holiday, new car etc
Notice accounts usually earn higher interest rates than easy access accounts. However, notice accounts require you to give advance notice that you intend to make a withdrawal. How much notice is needed will depend on your bank.
3. Regular saver accounts
Ideal for: Building up your savings
Regular saver accounts tend to attract higher interest rates than easy access or notice savings accounts. Rates can be as high as 3% per year. The trade-off is that they have strict terms and conditions and you may be penalised if you miss a month’s deposit. And you might not be able to make any withdrawals (or only a limited number of them) until the agreed term expires.
4. Individual savings accounts (ISAs)
Ideal for: Long term savings goals
Individual savings accounts (ISAs) work in much the same way as any other savings accounts, except that any interest you earn is tax-free. Interest rates can be fixed or variable, meaning they may change over time. ISA interest rates are usually higher than you’d find on other types of savings accounts (though typically they’re not as high as the rates offered on regular saver accounts).
One of the drawbacks is that there’s a limit to how much you can deposit into an ISA each tax year. This is known as your ISA allowance.
There are three main types of ISA:
- Cash ISAs, which hold your money in cash
- Stocks and shares ISAs, which invest your money on the stock market.
- Innovative finance ISAs, these allow savers using peer-to-peer lending platforms to receive tax-free interest
Stocks and shares ISAs can potentially earn much higher returns than a cash ISA. However, as with any investment you risk losing money if an investment performs badly.
5. Fixed-rate bonds
Ideal for: Long term saving
Fixed-rate bonds are accounts that allow you to deposit a single lump sum for a set period. This can range from a minimum of six months up to five years or even more.You’ll be unable to access your money for the duration of the term. However,you’ll receive interest every year that you have the bond, and this interest rate is fixed for the duration of the term.
How safe is my money?
The Financial Services Compensation Scheme (FSCS) covers your savings up to £85,000 (£170,000 for joint savings accounts).