Everything you need to know about saving and savings accounts.
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Savings Quick Links:
- An Introduction To Savings Accounts
- How Savings Are Taxed
- How Safe Are Your Savings?
- Best ISA Accounts
- Best Instant Access Savings Accounts – Top rate: 1.5%
- Best Fixed Rate Fixed Term Savings Accounts
An Introduction To Savings Accounts
There are several types of savings accounts and the best type for you will depend on your financial needs. Generally the best savings account is the one that gives the highest interest rate. However, since the 2008 financial crisis and the credit crunch that followed it, savings rates haven’t been sexy. This is because savings rates since then have always been lower than inflation. Which means that it is impossible to grow your money in real times by putting it in a savings account.
3 Steps To Getting Richer By Saving
Try to put a fixed amount of money – as much as you can spare – into savings every month.
Fill Your Annual ISA First
As of this tax year (18/19), everybody gets an ISA allowance of £20,000. You never pay tax on gains earned within an ISA wrapper, so it’s always best to save in an ISA first until you’ve reached the annual limit.
Lock Up Money You Don’t Need Within A Year
You’ll get a higher savings rate if you can put money into fixed rate fixed term savings rates or bonds. So if you don’t need the money imminently, this is the way to go.
Paying Tax On Savings: How Savings Are Taxed
As of April 2016, savings interest is paid gross (which means without the tax being deducted already).
Most people get a Personal Savings Allowance (PSA), as follows:
- 20% tax payers get £1000 tax free and must pay tax on any interest received above £1000.
- 40% tax payers can earn £500 per year and must pay tax on any interest received above £500.
- 45% tax payers do not get a Personal Savings Allowance and therefore every penny of interest is taxable.
If you earn more interest in a year than your Personal Savings Allowance limit, tax is paid at the same rate as your income tax – but only the amount over the limit.
e.g. if you’re a 20% tax payer and you earn £2000 of interest in a year, you only need to pay tax on the second thousand, because the first thousand is your personal savings allowance.
ISAs and Premium Bonds DO NOT COUNT towards your tax free allowance. They are tax free regardless of your financial situation.
How Safe Are Your Savings?
£85k is protected by the government. So if you have more than that, well done and lucky you! But don’t put more than £85,000 in a single financial institution.
Instant Access Savings Accounts
Instant access savings accounts deliver an interest at a specified rate either annually or monthly. Instant access means you can withdraw your money whenever you want to.
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An online only account from the company that runs the world. Offering an interest rate of 1.5%, this is the best we can find at the moment. It’s not an inflation beating interest rate but it’s still by far the best available at the moment. Read our full review here.
Fixed Rate Fixed Term Savings Accounts
This type of account requires you to ‘lock up’ your money for a set time period, usually ranging from 1-5 years. At the end of the term, interest will be paid at a prescribed rate on the balance you put in the account. You cannot access your money during the ‘lock up’ period, but you usually get a higher savings rate because you locked it up.