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What is a savings account?

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Written by Dom James, Financial Content Writer

17 April 2020

A savings account will help you grow your money, whether you need access to your cash or not. Here is how they work and what options you have.

What is a savings account?

A savings account is somewhere you can put your money so it can grow in value. The growth on your money, or savings, is called interest.

You can apply for a savings account with most banks, building societies and online savings providers, all have their own range of accounts.

How do they 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 at least £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 rateHigher rateAdditional rate
20%40%45%

Some savings accounts are completely tax free; they are called ISAs (Individual Savings Accounts).

ISAs are only available as sole savings accounts, meaning you cannot have more than one person named on the account.

Who can open a savings account?

Almost everyone, as long as you are a UK resident.

Most savings accounts are designed for adults, but there is also a selection of accounts for children under 16. Here is more information on how you can save for your child.

How much do you need to save?

This depends on the savings account you choose. Some need a minimum opening deposit, which can be between £50 and £1,000, but some accounts can be opened with as little as £1.

Can you have a savings account with someone else?

Yes, but only if the savings account is not an ISA.

You can usually open a savings account with at least one other person, or add them to your account at a later date.

What are the different types?

There are several types, all with different ways for you to pay in your money and withdraw it again.

Here is a list of the most common savings accounts:

  • 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 an interest 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.

  • Fixed 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.

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

Can you save in your current account?

Yes, but only consider a current account for savings if you find one that pays more interest than savings accounts offer, and you can remain disciplined not to take your money out.

Here are a few reasons why you should not save your money in a current account:

  1. Lower interest rates compared to savings accounts, and some pay no interest at all. There may also be restrictions on how much of your balance you can earn interest on.

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

  3. Monthly fees are common with high interest paying current accounts.

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

How safe is your money?

When you save your money through a bank or building society you should check if they are protected under the government's Financial Services Compensation Scheme (FSCS).

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. If you do this you can stay within the £85,000 per person FSCS savings limit.

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 guides, which explore how each type works in more detail:

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

Maximise the value of your savings by hunting down the best rates available.

Compare savings rates

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