These accounts are designed for saving rather than everyday spending, providing a simple place to grow your money over time. There are different types of savings accounts, each with its own features.
Types of savings accounts
Interest rates are typically calculated annually, but can also be paid monthly or quarterly. For example, if you have £1,000 in a savings account with a fixed 2% annual interest rate, you’ll earn £20 in the first year. If you leave that money untouched, in the second year, you’ll earn £20.40, and in the third year, £20.81.
This method of earning interest on both your initial savings and any interest already earned is called compound interest. It can make both savings and debt grow like a snowball rolling down a hill - as it rolls, it picks up more snow and grows larger.
For the 2024/25 tax year, the Personal Savings Allowance (PSA) allows you to earn interest on your savings without paying tax. The amount you can earn tax-free depends on your income tax rate:
- £1,000 for basic rate taxpayers;
- £500 for higher rate taxpayers; and
- £0 (nothing) for additional rate taxpayers.
Easy-access savings accounts
Easy-access savings accounts allow you to add or take out money whenever you like, making them very convenient. But, they usually offer lower interest rates than other types of accounts. They’re great for people who want quick access to their money without any penalties.
Fixed-rate savings accounts
Fixed-rate savings accounts are a good choice if you can leave your money saved for a set period. They typically offer higher interest rates, which increase the longer you commit to saving, with terms ranging from one year to several years. This type of account is ideal for those who want to earn more interest and don’t need to access their savings right away. Although you may be able to withdraw your money within the fixed-rate term, charges or penalties may apply.
Individual Savings Accounts (ISAs)
Individual Savings Accounts (ISAs) come in several varieties, but all are free of both income tax and capital gains tax (CGT). This makes them a tax-efficient way for you to save or invest. Most ISAs can be opened by anyone over 18 years old and allow you to contribute up to £20,000 per tax year (2024/25).
There are different types of ISAs, such as:
- Cash ISAs;
- Flexible ISAs;
- Innovative Finance ISAs (IFISA);
- Junior ISAs (JISA)*;
- Lifetime ISAs (LISA)**; and
- Stocks and Shares ISAs.
*Junior ISAs (JISAs) must be opened by a parent or guardian of a child under the age of 16. The annual contribution limit is £9,000 per tax year (2024/25).
**Lifetime ISAs (LISAs) can be opened by anyone aged 18-39 and are intended to help you save for your first home, or for retirement. They differ from other ISAs because the government adds a 25% bonus to your deposits. Because you can save up to £4,000 a year into a LISA, you could earn a bonus of up to £1,000 each year.
Some ISAs are limited to specific types of investments. For example, Cash ISAs can only hold cash, while Stocks and Shares ISAs must be invested in the stock market or other investments. Other ISAs, such as Junior ISAs and Lifetime ISAs, can hold either cash or investments, depending on the provider.
The best ISA for you depends on your financial goals. Specifically how long you’re saving for and how much risk you’re comfortable with. Ultimately many find that using a combination of ISAs works best. This helps spread risk and ensures you’re saving efficiently for both short-term and long-term goals.
Regular savings accounts
Regular savings accounts are for people who can save a set amount of money each month. They usually offer higher interest rates than easy-access accounts, but you might not be able to take out money as often. This type of account is perfect for those who are good at saving and want to grow their savings steadily.
Notice savings accounts
Notice savings accounts require you to let the bank know before you take out your money, usually giving them a warning of 30-120 days. In exchange, these accounts generally offer better interest rates than easy-access accounts. They’re ideal for savers who can plan ahead and don’t need quick access to their money.
Choosing the right account
When selecting a savings account, you may want to consider the below:
- Access - how often do you need to access your money? If you expect you might want to dip into your savings from time to time, an easy access account might be the best option.
- Interest rates - is the interest rate on the account competitive? Higher rates often come with certain conditions, such as limited access or having to save into the account regularly.
- Tax-efficiency - are you saving in the most tax-efficient way? If you haven’t used up your ISA allowance, consider whether a tax-free savings account could help you minimise your tax liability.
Savings accounts offer various options to help you grow your savings effectively. By understanding the different types of accounts and their features, you can make a choice that fits your financial needs and goals. Remember, the right savings account for you is one that matches your personal circumstances and helps you achieve your financial goals.
Risk warning
As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.
Last edited: 07-02-2025
