What is a high-interest savings account and how do they work?

A high-interest savings account offers a top interest rate on your balance compared to a basic bank account. 

While there are many savings accounts on the market, this article will focus on regular savings accounts. 

Summary 

• A high-interest savings account offers a low-risk way to grow your money by offering interest on your balance. 
• However, there are conditions you must meet with some of the best rates available to existing customers only. 
• A financial adviser can offer guidance on how to get the most out of your money.  

What is a high-interest savings account? 

A high-interest account offers an easy, low-risk way to grow your savings by offering interest on your balance. 

If you do your research, you can apply for regular savings accounts with interest rates that beat inflation, so rising prices aren’t eroding the value of your money. 

Regular savings accounts tend to offer the highest rates of interest with little risk, but there’s a lot to consider. 

We’ll explore what you need to know. 

How do high-interest savings accounts work? 

You can earn up to 7% annually on your money with a regular savings account. These accounts are ideal if you save a set amount every month. 

While some accounts offer a fixed rate of interest, others are variable, which means the provider can increase or decrease the rate on offer.  

You must save a minimum amount every month, and there are limits on how much you can contribute. Additionally, there are usually restrictions for withdrawals.  

Another downside to these types of savings accounts is that the interest rate you receive is usually only for a year – after this, the rate tends to fall dramatically. 

If you fail to deposit a minimum amount every month, you may lose your interest rate, and your account could be closed.  

If your bank or building society is regulated in the UK, up to £85,000 of your money is protected under the Financial Services Compensation Scheme (FSCS). 

If you have more than £85,000 in savings, it’s worth spreading these across more than one bank.  

What are the best high-interest savings accounts? 

At the time of writing, the best rates on regular savings accounts are for existing customers. 

If you're an existing customer of First Direct, Co-operative Bank, or Skipton Building Society, you can get a rate of 7% with their regular savings accounts. 

There are regular savings accounts that are open to new customers – the top rate is currently 6% with Principality Building Society.   

Can I open more than one high-interest account? 

Yes, you can have more than one regular savings account if you have more savings than the maximum you can put away each month. 

However, you’ll likely be limited to one with each provider.

Is my interest tax-free? 

Any interest you earn from a regular savings account is tax-free if you don’t exceed the personal savings allowance (PSA). 

If you’re a basic-rate taxpayer, your annual PSA is £1,000, while higher-rate taxpayers have a PSA of £500. Additional-rate taxpayers have no PSA.  

An individual savings account (ISA) is worth considering if you’re worried about exceeding your PSA.  

How do I choose a high-interest savings account? 

There’s a lot to consider when looking for a savings account. 

With a regular savings account, it’s worth researching to find the highest interest rate, but this isn’t the only consideration. 

It’s also worth looking into: 

• If the interest rate is fixed or variable.  
• Whether you need to be an existing customer of the bank or building society. 
• How much you can deposit each month and for the whole year. 
• Whether you can skip any months to deposit money. 
• If any withdrawals are allowed penalty-free. 
• How you can open and manage your account. 

How much can I deposit into my high-interest savings account? 

How much you can deposit varies significantly by the bank and building society. 

The best regular savings accounts, at the time of writing, offer an interest rate of 7%. 

For example, first direct allows you to deposit up to £300 a month (up to £3,600 for a year), with a minimum monthly deposit of £25. 

The pros and cons of high-interest savings accounts 

Before opening a regular savings account, it’s a good idea to consider the advantages and disadvantages. 

The pros of high-interest savings accounts 

• Access better rates: Regular savings accounts tend to offer the best savings account rates, typically beating fixed and notice accounts. 
•  Your money is protected: Up to £85,000 per person is covered by the FSCS if your bank or building society is regulated. 
• You can see how your money will grow: Knowing how much you can deposit each month in a regular savings account with a fixed rate will help you calculate how your money will grow and help you reach your goals.  

The cons of high-interest savings accounts 

• Regular savings account restrictions: You’re restricted to how much you can deposit each month and may receive a penalty if you withdraw money. To access the best rates, you may need to be an existing customer. 
• You could lose your top interest rate: If you fail to make a deposit or withdraw money, your rate could be affected. Savings accounts with variable rates mean your rate can go both up and down, so opting for a fixed rate is worthwhile.  
• You may have to pay tax on interest: If you exceed your PSA, you may have to pay tax, which can be avoided with ISAs.  
• You’ll have to switch: Once your set period is up (usually a year), the rate on your regular savings account will fall dramatically, and you’ll have to switch.  

Should I get a high-interest savings account? 

Whether a high-interest savings account is right for you depends on many factors, including your savings goals and whether you’ll need access to your money within the fixed period. 

If you have more savings than you can deposit, you can always drip-feed it into a regular savings account every month and benefit from the generous interest rates. 

Want to get the most out of your money? 

Unbiased can connect you with a financial adviser regulated by the Financial Conduct Authority, who can look at your circumstances and help you reach your goals for a brighter financial future.