High-interest accounts can add hundreds or even thousands of pounds to your savings each year. Banks and building societies are keen to reward their customers and encourage them to continue banking with them over their competitors, so one of the perks they offer can be higher interest rates.
High-interest accounts can be current accounts or specialist savings accounts that accrue interest from both your bank and the government. However, with interest rates at historic lows (although they are on the rise) bank accounts with good interest rates can be hard to track down.
So how does interest work? How much interest can you accrue over time? And what exactly is a high-interest bank account?
We are going to explore all this and more as we find out where you can find high-interest bank accounts.
Where to find high-interest bank accounts?
You can open high-interest bank accounts with most high street banks, though be sure that the bank is FCA accredited so that you know that your money is secure. High-interest bank accounts include current accounts with good interest rates, cash ISAs, Lifetime ISAs, regular savings accounts, and Help to Save accounts.
We will come to explore each of these options in detail, but let’s start off with the basics and find out how interest rates actually work.
How do interest rates work?
Interest rates inform you of how much the cost of borrowing money is or how much you will be rewarded for saving.
If you are borrowing money from a bank or another lender, then interest is the amount on top of the original loan you will have to pay back. If you borrow £100 and there is 1% interest, you will have to pay back £101. In this scenario, interest is a charge you pay for borrowing money.
If you are saving money in a bank or another financial depository, then the interest rate determines the amount your account will be paid in addition to the money that is already in there. This is to reward you for saving with that bank.
When you save money with a bank, your savings are then partially used for loans to other customers. For example:
- Person A puts £100 into a bank account with a 2% interest rate.
- Person B wants to borrow £50 from the same bank.
- The bank lends person B £50 from person A’s account with 10% interest.
- Person B then pays the bank back £55 (which is £50 + 10% interest).
- The bank then returns person A’s £50 along with the 2% interest on their £100, which is £2.
- So person A ends up with £102.
- And the bank has £3 left over for themselves.
These are the essentials of interest and credit creation, though, of course, it becomes much more complex in the modern world of finance and capital.
What are the current rates of interest?
Different banks and lenders offer different rates of interest for all loans, mortgages, savings accounts, etc.
However, the key interest rate in the UK is the Bank Rate, which is set by the Bank of England. The Bank of England is the central bank for the United Kingdom and it plays a key role in the amount of money that is in circulation throughout the country.
The Bank of England lends other banks money and sets the base rate of interest for all other banks; the Bank Rate.
The current Bank Rate is 1.25%.
The current Bank Rate is the highest it has been since prior to the financial crash of 2008/09. In some of the interim years, the Bank Rate was at all-time lows of 0.1%.
Why do interest rates change?
The board of the Bank of England decides every six weeks what the Base Rate should be. They can choose to raise or lower the rate depending on what they believe would be best for the economy at that moment.
When the Bank Rate is low, other interest rates are also low and vice versa. This means that when the Bank Rate is low, borrowing is encouraged and people are less likely to save. This then boosts the economy as it incentivises people to borrow money to buy property and capital, or to start their own businesses.
When the Bank Rate is high, borrowing is discouraged and saving is incentivised. This is done if there are high levels of inflation. For example, if property prices rise too quickly because of excess demand, the Bank Rate may be put up to discourage people from taking out a mortgage. This then stifles the spike in demand and reduces inflation.
However, interest rates at high street banks depend on more than just the Bank Rate. For example, when it comes to loans, factors such as the risk of the loan not being paid back, contribute to the interest on the loan.
If the lender thinks there is a high risk of the loan not being paid back in full, then they will raise the interest charged. If you are then unable to repay the loan, the bank can repossess your property and belongings until a sufficient amount has been repaid.
What are high-interest current accounts?
Most current accounts pay interest, even if it is very little. High-interest current accounts pay you a highly competitive rate of interest, provided that you are in credit, and are used for immediate transactions. Sometimes, the rate of interest can even be higher than it is in an easy-access savings account.
Many of the options with the highest levels of interest will require you to deposit a certain amount of money into your account before you can access the highest rates of interest.
What other high-interest accounts are there?
A high-interest current account is only one of many options that are available to you if you are looking to get a large return on your money.
High-interest savings account
A high-interest account can also refer to a savings account. Savings accounts differ from current accounts as you will often have to provide extra notice or access requests to use the money stored in them.
Most savings accounts offer higher rates of interest than current accounts. So current accounts are best for day-to-day transactions, whereas savings accounts are good for long-term savings, hence the name.
There are a wide variety of savings accounts that each offer different rates of interest and have easier or harder access to use the money.
Individual Savings Account (ISA)
Money held in an ISA is not taxed and ISAs often have the highest rates of interest available.
You are limited to saving £20,000 per year in an ISA, but for many people, this is a very attractive option.
You can put up to £4,000 into a Lifetime ISA and your savings are then supplemented by the government for when you either want to buy a house or retire.
If you withdraw your money for reasons outside of buying a property or retiring, then the interest is lost.
Help to Save
The Help to Save initiative helps lower-income earners who claim Universal Credit or working tax credits to save more money.
Help to Save pays a 50% bonus on the amount saved up to £1,200 over the course of four years.
A bond is essentially a loan you lend to the government. You put your money into bonds, which are very safe investments, and your money is then returned to you at an agreed point with additional interest.
A fixed-rate bond guarantees a certain amount of interest for a set period of time. This is a good option for anyone with a lump sum to save, looking for a safe place they can keep their money.
How to choose a high-interest bank account?
When there are so many high-interest accounts to choose from, where do you start when you are looking to open an account?
With so many to choose from, be sure to keep your eye on all the options available. Don’t be afraid of switching accounts if you find a higher-interest option than the account you currently have.
Research the switching incentives
Many banks and building societies offer switching incentives and perks that reward you with gifts such as instant cash or extra interest for the first few months.
Keep a look out for some of the best incentives and you can end up accruing significant amounts in rewards and perks.
How much can I save in a high-interest bank account?
Most high-interest savings accounts have a maximum limit that you can deposit and receive the advertised interest rate. However, this limit can be huge and in many cases, you will never be anywhere near it.
So most people looking to save extra money in a high-interest account are more interested in how much tax they will have to pay on the extra savings they get from interest.
In the UK, interest payments made on savings are regarded as a form of income and are, therefore, subject to taxation.
The amount of tax you pay on your interest is determined by the Income Tax band you are in.
- Basic rate taxpayers (20%) who earn less than £50,271 can earn £1,000 of interest on their savings before they pay tax.
- Higher rate taxpayers (40%) who earn between £50,271 and £150,000 can earn £500 of interest before they pay tax.
- Additional rate taxpayers (45%) who earn over £150,000 don’t get any personal savings allowance.
Any interest that is earned over the allowance then contributes to your income and is taxed at the rate of the bracket you are in.
If you want to avoid paying tax on your savings you can open an ISA, which is entirely tax-free.
Are savings accounts safe?
Before opening a high-interest bank account, you should first ensure that the bank is accredited and regulated by the Financial Conduct Authority (FCA). If it is, then it should be protected by the Financial Services Compensation Scheme (FSCS), which means that should the bank go bust then the government will cover your losses – up to a point.
The FSCS guarantees to protect savings of up to £85,000 for individuals and up to £170,000 for joint accounts. If you have more than those figures in savings, it might be best to spread your money across different accounts to ensure that it is all fully protected in the event of one of your banks going bust.
If you want to open an account with a bank that is not regulated by the FCA, then be sure to do your research into the protections the bank has as it could cost you dearly if it were to collapse.
Most banks have high-interest accounts available for their customers, though the rates of interest and the additional perks will vary.
It is often a good idea to split your money between accounts if you are saving larger sums, that way you know that it is protected.
The type of high-interest account you choose will depend on how much money you have, how easily you want to be able to access it, and the reasons you are looking to save some money.