Savings: Most Frequently Asked Questions

November 26th, 2019

Read the most frequently asked questions about savings; see the answers, compare quotes and find the best deal to suit you.

How do I begin saving?

Everyone has different circumstances. Begin anywhere you think fits your situation best, according to your needs.

Interest rates on current accounts may be worth looking into. Beyond that, you may find it a good idea to put any spare money you have into a savings accounts which you can do whenever you want without being tied to a regular amount. If you know you have a minimum amount each month then paying into a regular monthly payment saving account might pay a better rate of interest.

What will be tax deductible on my savings?

UK banks deduct 20% income tax from interest earned from a conventional savings account; however, from April 2016 new measures will come into force, whereby the first £1,000 interest accrued in savings by a basic-rate taxpayer will be exempt of tax.

How does this work if I am not a tax payer?

Prior to April 2016, a form called an R85 would need to be filled in and submitted to your bank or building society.

What difference does it make if I am a higher-rate tax payer?

If you pay a higher rate of tax, you will need to complete a tax return from HMRC. You will be liable for extra income tax. However, the new measures brought in after the last Budget mean that from April 2016, the first £500 of your accrued interest will be tax free.

Is there a legal way I can escape having to pay tax on my savings interest?

Yes. You could invest your savings into an Isa account. With an Isa any accumulated interest you earn, will not be liable for tax. You can read more here in our beginners’ guide to Isas.

What is the difference between gross and net rate of interest?

  • Gross interest rate: the rate of interest on your savings before tax deduction
  • Net interest rate: the rate of interest after deduction of tax.

What does compound interest mean?

The interest that is paid on interest is called compound interest. Getting to grips with compound interest is sensible as there are good long term benefits to be gained.

What does AER mean and is this different from APR?

AER is the shortened form of Annual Equivalent Rate; it is the gross rate after compound interest has been deducted. AER is applied to savings accounts.

The APR is the shortened form of Annual Percentage Rate; it is applied when comparing interest rates for credit cards and loans.

What is the definition of a regular savings account?

In a regular saver account you deposit a regular sum of money into a savings account each month. You cannot usually pay in a lump sum but interest rates are usually more favourable.

What does an instant access account mean?

This type of savings account is one of the most straightforward savings accounts. In an easy-access or instant account you can deposit any amount of money and withdraw it whenever you like and gain interest on your savings. The downside is that interest rates are usually quite low.

What is a fixed rate bond?

This usually has a higher interest rate than the easy-access options, because in a fixed-rate bond you agree to put your money aside for a pre-established period of time. This will most often be between 1 and 5 years, which is your choice. You may be able to withdraw within the pre-determined time but with a penalty for doing so.

What does a notice account mean?

With this type of account, you can withdraw money when you have completed a notice period. Notice Accounts tend to differ in the options for notice periods and it’s advisable to carefully read the Terms & Conditions first.

What does a bonus interest rate mean?

Occasionally, a savings account will have what is called a bonus interest rate which, for an introductory period, is paid out on top of the standard interest rate. It’s wise to be clear as to when this bonus period ends as you may well find it best to change accounts to gain advantage of another introductory offer on a different account.

For answers to any further questions, see our savings guides.

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