Keeping money in a current account rather than a savings account is one of the most common and costly financial oversights in the UK. Current accounts typically pay little or no interest, while dedicated savings accounts can offer meaningfully better returns, particularly in periods of higher interest rates.
Understanding the different types of savings account available helps you choose the right home for your money based on when you might need it and how much flexibility you want.
Easy-access savings accounts
An easy-access savings account — sometimes called an instant-access account — allows you to deposit and withdraw money without restriction. There are no penalties for withdrawals and no minimum notice period required.
Interest rates on easy-access accounts are variable, meaning the rate can change at any time. Providers often launch accounts with attractive rates to attract new customers and then reduce them over time, so it is worth regularly checking whether your rate is still competitive.
Easy-access accounts are best suited for emergency funds and money you might need at short notice. They are also a reasonable default for any cash you have not yet decided what to do with.
Notice accounts
A notice account requires you to give a set period of notice before making a withdrawal — typically 30, 60, 90 or 120 days. In exchange for this reduced flexibility, notice accounts generally pay a higher rate of interest than easy-access accounts.
Notice accounts suit money you are unlikely to need quickly but do not want to lock away entirely. If you do need to access your money before the notice period ends, some providers allow early withdrawal with a penalty (typically the loss of a set number of days' interest).
Fixed-rate savings bonds
A fixed-rate bond — also called a fixed-term deposit or fixed-rate savings account — locks your money away for a set period in exchange for a guaranteed interest rate. Terms typically range from six months to five years, with longer terms generally offering higher rates (though this is not always the case).
Once your money is in a fixed-rate bond, you typically cannot access it until the term ends without incurring a significant penalty. For this reason, fixed-rate bonds are only suitable for money you are certain you will not need for the duration of the term.
Because the rate is fixed at the outset, a fixed-rate bond offers certainty about the return you will receive — which can be valuable if you expect interest rates to fall.
Cash ISAs
A Cash ISA (Individual Savings Account) works like a savings account but with the added benefit that interest is completely free from UK income tax. The annual ISA allowance — the amount you can put into ISAs in a given tax year — is currently £20,000 (check gov.uk for the current figure).
Cash ISAs are available in easy-access and fixed-rate forms. They are particularly valuable for higher-rate taxpayers, those with significant savings, or anyone who wants to protect future returns from tax. See our separate guide to Cash ISAs for more detail.
Regular savings accounts
Regular savings accounts require you to deposit a set amount each month — typically between £25 and £500 — and often offer the highest headline interest rates available on savings products. In exchange, they usually come with restrictions: you must make regular monthly deposits, you may be limited in how many withdrawals you can make, and the account may only run for a fixed term (commonly 12 months).
If you can commit to regular monthly deposits and do not need access to the money during the term, regular savings accounts can offer an excellent return on new money being saved. They are less suitable for a lump sum.
Premium Bonds
Premium Bonds are offered by National Savings and Investments (NS&I), which is backed by the government. Rather than earning interest, Premium Bonds enter you into a monthly prize draw in which you can win tax-free prizes ranging from £25 to £1 million. The odds of winning depend on the total prize fund, which is set by NS&I and reviewed periodically.
Premium Bonds are fully protected (as NS&I is government-backed) and your capital is not at risk. However, you might win nothing in any given month — and the average return across all bondholders may be lower than what a good savings account pays. They are most appealing to those in higher tax brackets, since prizes are tax-free, or those who enjoy the lottery element.
How is savings interest taxed?
Most UK adults have a Personal Savings Allowance (PSA) that allows them to earn a certain amount of savings interest each tax year without paying tax on it. Basic rate taxpayers can earn up to £1,000 in interest tax-free; higher rate taxpayers can earn up to £500; additional rate taxpayers have no PSA.
Interest earned above your PSA is taxed at your marginal income tax rate. If you earn significant savings interest, you may need to declare it on a self-assessment tax return. Interest earned within an ISA does not count towards your PSA and is never taxable.
Is your money protected?
Savings held with UK-authorised banks and building societies are protected by the Financial Services Compensation Scheme (FSCS) up to £85,000 per person per institution. If you have more than £85,000 to save, consider spreading it across multiple authorised institutions to ensure full protection.
NS&I (where Premium Bonds and some other savings products are held) is backed by HM Treasury and has no FSCS limit — your money is 100% protected regardless of the amount.