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What is the best way to earn interest on your savings?

Discover the best way to earn interest on your savings and why finding the highest guaranteed interest rate for the longest possible term is a big advantage. 

Summary

  • Instant-access savings accounts usually have the lowest interest rates due to their liquidity.

  • Individual savings accounts (ISAs) offer tax-efficient earnings on interest.

  • Fixed-term savings accounts typically offer the highest interest.

  • Notice accounts provide a balance of higher interest rates and liquidity.

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How do I earn interest on my savings account?

There are many ways to earn interest on savings accounts, which offer different benefits and considerations.

Some of the best ways to earn interest on savings in the UK include instant savings accounts, cash individual savings accounts (ISAs), fixed-rate bonds and notice accounts.

Instant access savings account

An instant access savings account is a flexible option that allows you to deposit and withdraw money freely.

Banks and building societies typically offer this type of savings account, which usually has a low minimum balance requirement. An instant-access savings account provides liquidity, which means you can access your funds whenever you need them.

While the interest rates are typically lower compared to other savings accounts, a big advantage is the convenience of having immediate access to your money. This is helpful for unforeseen circumstances but can be a temptation for those who struggle to control their spending. 

Cash ISA

Cash ISAs are tax-efficient savings accounts in the UK that were introduced in 1999.

They allow individuals to save money without paying UK or capital gains tax on the interest earned.

The current annual ISA allowance is £20,000, meaning individuals can add this amount to their ISAs every year.

The UK government has decided to freeze the ISA limits for the 2024/25 tax year, so this means the overall ISA allowance will remain at £20,000.

It’s also worth mentioning the stocks and shares ISA, which is different from a traditional individual savings account as it involves investing in the financial markets.

It's a tax-efficient way to make investments with the potential for higher returns, but this can be risky. It is recommended for individuals with a longer investment horizon so they can ride out market volatility to avoid losses.

Fixed-rate bond

A fixed-rate bond is typically a high-interest savings account that offers a set interest rate for a specified period, such as one or five years.

These accounts usually provide better interest rates than instant access accounts and provide a predictable return.

One downside of a fixed-rate bond is that your money is locked in for the fixed term, meaning you can't access it without incurring penalties.

It's recommended to compare the available rates and consider factors such as inflation (currently 3.9%)  and your financial goals before settling on a fixed-rate bond.

The following are the rates at the time of writing:

  • 1-year fixed-rate bonds: Up to 5.30%

  • 5-year fixed-rate bonds: Up to 4.55%

Notice accounts

A notice account requires you to inform the bank ahead of time before making a withdrawal. For example, some notice accounts require a 30-day notice period for a withdrawal.

This type of savings account typically offers high interest and is an option for people who can plan their withdrawals further in advance.

Notice accounts provide a balance between liquidity and earning a competitive interest rate.

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What is the average interest earned on a savings account?

The average interest earned on savings accounts varies based on market conditions and the type of account.

However, following many increases in base rate over the last two years (currently at 5.25%), savers are benefitting from more competitive interest rates and can now beat inflation. 

How much interest will I earn on my savings?

To determine the simple interest you will earn on your savings, you can use the following formula:

Simple interest earned = (principal amount x annual interest rate x time) divided by 100

SI = Simple interest

P = Principal amount

R = Annual interest rate

T = Time

For example, if you save £3,000 in a cash ISA with an interest rate of 4.25%, you can calculate the interest for one year as follows:

SI = (P x R x T)/100

    = (3000 x 4.25 x 1)/100

    = 12750/100

    = £127.50

The interest earned on £3,000 in a year at a rate of 4.25% will be £127.50.

Alternatively, many banks provide online calculators to help you estimate your potential interest earnings.

Regularly assess your account statements to understand the compounding frequency of your savings account and more accurately calculate interest over a longer period.

Want to learn more about savings?

The best way to earn interest on your savings is to choose an account that suits you.

While the rates, terms, and conditions of UK savings options differ, the interest rate is higher than it's been since 2008, which is good news for those with money to save.

If you'd like to learn more about savings, let Unbiased match you with a financial adviser who can offer you financial advice, taking into account your unique situation.

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About the author
Our team of writers, who have decades of experience writing about personal finance, including investing, retirement and pensions, are here to help you find out what you must know about life’s biggest financial decisions.