What is a savings account?

A savings account helps you to grow your money by paying interest on anything you stash away. There’s plenty of options depending on your goals. Here’s everything you need to know.

People open savings accounts for all kinds of reasons. You could have short term goals, such as emergency funds or saving for a holiday, or you might be saving for something big in the future such as a house deposit or wedding.

Knowing why you’re saving is important, as the right product will depend on your goals and timelines. But whatever savings account you choose, you need to make sure you will be able to access your money when you need it and that you’re getting the best interest rate available to grow your cash.

How savings accounts work

A savings account is a safe place for you to put your money so it grows in value, thanks to the interest it earns you. Interest is paid because your bank or building society effectively ‘hires’ your cash until you need it back. 

This is important for the account providers because they use the money to let them give other people loans or invest in other profitable ventures. Some of the money is held back to let people make withdrawals as they need the cash.

There are strict rules about how much banks and building societies are allowed to lend out and how much they must hold back for people to be able to withdraw.

Even in the worst cases, where a bank or building society goes bust, there is a government guarantee that at least £85,000 of your savings will be returned to you if the bank they are saved in is regulated.

To attract people to save with them the banks provide a range of savings accounts with different levels of interest rate.

The rising Bank of England base rate means that savings product interest rates are creeping up, but it’s still important to shop around to get the best deal. Even the highest-paying accounts are lower than inflation, so if you’re saving for a long-term goal it might be worth considering investing instead. 

Are you taxed on savings?

The government provides some tax advantages to help get people on the savings ladder. However, if your earnings from interest rise high enough and you don’t use an ISA, you will face a tax bill.

That’s because earnings from savings count as income - so will be taxed at the same rate as you pay income tax - after a certain level.

You do have a personal savings allowance, however, which is the amount of interest you can make on your savings before you need to pay tax on it.

You personal savings allowance changes depending on what level of income tax you pay, and currently stands at:

• Basic rate taxpayers can earn at least £1,000 worth of interest before paying tax

• Higher rate taxpayers can earn £500 worth of interest before paying tax

• Additional rate taxpayers 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:

Certain savings accounts, Individual Savings Accounts (ISAs), are tax-free, which makes them ideal if you’re likely to end up exceeding your personal allowance. 

You can usually open a savings account with at least one other person, or add them to your account at a later date. However, ISAs are only available as sole savings accounts, meaning you can’t open a joint ISA account.

Who can open a savings account?

Almost everyone can open a savings account, providing they’re a UK resident with a fixed address.

Most savings accounts are designed for adults, but there is also a selection of accounts for children under 16, including junior ISAs. 

How much money do you need to open a savings account?

The amount you need to start saving with a financial provider depends on the account you choose. Some banks and building societies require a minimum opening deposit, typically of between £50 and £1,000, but many accounts can be opened with as little as £1.

How much to keep in your savings account

Experts suggest that everybody has between three- and six-months’ worth of earnings in case of emergencies, so that is a good starting point. This should be kept in an easily accessible account so you can use it when you need to.

Beyond that, you might wish to save for other goals and how much you should keep in savings depends on those aims. 

If you’re planning on buying a property, for instance, you usually need to save up at least 5% of the price of the house you wish to buy. So, if you wanted a £100k flat, you’d need at least £5k in savings. If you were planning to buy a £500k house, you’d need at least £25k set aside. 

The Financial Services Compensation Scheme only guarantees to protect £85,000 per person, per financial institution. If you have more than this, you should consider spreading it across accounts.

If your goals are long term, such as retirement, you should consider investments rather than savings to enable your money to grow faster than the rate of inflation. 

What are the different types of savings accounts?

There are several types of savings vehicles, all with different ways for you to pay in your money and withdraw it . However, the most common options are: 

• Instant access: an account that lets you add money and take it out at any time.

• Notice account: you have to give notice to withdraw money (such as 60 days) or pay a penalty. These accounts usually let you pay in at any time.

• Regular saver: an account that requires you to save up to a set amount each month, which is ideal if you do not have a lump sum to save. Some will limit the number of withdrawals you can make in a year

• Fixed term savings account or bond: an account that locks your money away for a fixed term, such as one year. These accounts usually come with fixed interest rates for the whole term as you put the whole amount to be saved in when you open it.

Each of these account types is also available when you save using an ISA.

How to maximise earnings from a savings account

You should make a note to regularly review your savings accounts, to ensure you’re getting the best value possible. Look at what you’re currently earning, and then shop around for the best deal. 

• Easy access accounts – check regularly, particularly after a Bank of England base rate rises, and move your money if you spot a better rate.

• Regular savers – these often have penalties for early withdrawal, but most roll you onto a poorer rate after a set period, often a year. Make a note of the term when you start saving, and move your money when it ends, looking for the best rate.

• Fixed term accounts – again, you will be penalised if you move your money early, but at the end of the term you should review your access requirements and then shop around for the highest rate.

• ISAs – if you want to move your ISA savings tread carefully. You need to do a transfer, rather than removing your money and placing it somewhere else, or it will count towards your ISA allowance. Look for a provider with good rates that allows transfers in.

Think carefully about how much access you need. Agreeing to lock your money away in a fixed-term product typically means higher interest rates, but the penalties if you need to withdraw cash in an emergency can be severe. You might want a range of savings options, some that are easy access and others that are more restricted but with higher rates.

Can you save in your current account?

Leaving money in your current account is only sensible if your bank pays interest on accounts in credit – so check carefully as not all do. 

Those that do pay interest can offer fairly high rates, but shop around anyway to make sure that you can’t find a better interest rate in a dedicated savings product. 

Also check what your bank offers, as some have regular savings accounts for customers with market leading rates available. 

Remember, if you’re leaving money in your current account as savings, you need to remain disciplined not to take your money out.

Here are a few reasons why you shouldn’t save your money in a current account:

• Lower interest rates some banks have much lower rates for accounts in credit compared to savings accounts, and some pay no interest at all. Even the better paying accounts often put restrictions on how much of your balance they will pay what rate on.

• You could spend your savings easily: when your money is readily available, you may be tempted to dip in every now and again, which’ll eat away at your savings.

• Monthly fees are sometimes applied to high interest paying current accounts.

More vulnerable to fraud: you could lose your money through debit card fraud.

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How safe is your money?

The FSCS protects all banks, building societies and credit unions that are authorised by the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA). If you’re not sure, you can check on their website to make sure your provider is regulated.

This scheme covers your savings up to £85,000 (£170,000 for joint savings accounts). This means you would get your money back if your bank or building society collapsed.

If you want to save more than £85,000, think about spreading your savings across more than one bank or building society. These need to be independent of each other as the compensation scheme will consider two sister banks as being parts of a single entity. 

How do you start saving?

Most savings accounts can be opened in a branch, online or through the post.

To help you figure out which savings account to open, read these pages, which explore how each type works in more detail:

• What is an ISA?

• What is a fixed bond?

• Peer to peer savings accounts

If you want to skip straight to figuring out which account is right for you, read this guide.