Interest and savings accounts

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Key takeaways
  • Savings interest: The amount of interest you’ll earn on your savings depends on the AER, how much money you have in your account, and how interest is calculated

  • Base rate: Savings account interest rates are usually influenced by the Bank of England base rate

  • High returns: The best savings account interest rates tend to be offered on accounts that require you to lock away your cash for a fixed period of time

How to calculate interest on a savings account

The simplest way to calculate interest on a savings account is to multiply your account balance by the interest rate by the time period you plan to have the money in the account.

The equation looks like this:

D x R x T = interest earned

D = Initial deposit

R = Rate

T = Time in the account

This calculation should give you a good idea of how much interest you’re likely to earn, but other factors such as compounding will also dictate how much you’ll receive.

In the UK, most savings account interest rates are advertised with the AER, or annual equivalent rate. Unlike the gross interest rate, the AER calculation takes bonuses, compound interest and bank charges into account to show exactly how much interest you’ll earn over a full year.

How is interest paid on savings accounts?

How interest is paid depends on your savings account and provider, so it’s best to check the details to make sure you’re getting an account that’s right for you.

It’s common to receive interest payments once a year, either on a predetermined date or on your account opening anniversary. Some accounts pay out interest monthly, and some may pay quarterly. In the case of fixed rate bonds, you may only receive an interest payment when your account matures, which could be up to five years.

You’ll usually receive interest payments into a bank account you nominate, or the interest you earn can go straight back into your savings account.

Are savings account interest rates worth it?

The Bank of England (BoE) base rate is currently relatively high. While this isn’t great news for borrowers, it does mean savers can finally benefit from higher interest rates on savings accounts.

Generally speaking, some of the best savings interest rates in the UK are lump sum savings accounts that lock your money away to earn interest for a set period. You can view the top savings account rates in the table above. The most competitive lump sum account in our marketplace has an interest rate of 5.65% AER.

While locking your money away in a fixed rate bond usually delivers the highest return, interest rates on easy access savings accounts and notice accounts have also risen considerably over the last year or so. This means you can still benefit from a competitive savings rate without forgoing access to your cash.

When will interest rates go up or be cut?

No one can say with certainty when interest rates will change, as this decision ultimately lies with the banks that offer them. The BoE can influence change by altering the base rate, subsequently influencing financial institutions’ rates.

The base rate began to decrease after the 2008 financial crisis in response to the recession, and more recently, the economic impact of the pandemic. The BoE made emergency cuts to the base rate, reducing it from 0.25% to just 0.10% in March 2020 (the lowest base rate on record).

It remained at this rate until December 2021, when it went up to 0.25% amid concerns over rising inflation. But it didn’t stop there. With the cost of living crisis deepening and energy prices soaring following Russia’s invasion of Ukraine, the BoE proceeded to increase the base rate ten consecutive times to reach its current rate of 4% (correct as of February 2023), as shown in the graph below.

It’s impossible to know for sure whether the BoE base rate will continue to rise in 2023, but some analysts are predicting that we could be nearing the peak. Whatever happens, competition in the savings market is likely to continue in the months ahead as more savers switch their accounts to take advantage of recent interest rate rises.


What are the most common types of savings accounts?

There are several different types of savings accounts, all offering different benefits. These are the most common types of savings accounts:

  • Fixed rate bonds: Fixed rate bonds require you to lock away your money for a set period of time, typically one year, two years, three years, five years or six months. Interest rates are usually competitive, especially over the longer term.
  • Easy access savings accounts: The most straightforward savings account type, an easy access account is very flexible and allows you to deposit and withdraw money at any time. However, some of the most competitive easy access savings accounts may limit the number of withdrawals you can make in a 12-month period.
  • Notice accounts: With a notice account, you can usually make deposits or withdrawals at any time, but you will need to give notice (typically between 30 and 180 days) to withdraw your savings.
  • ISAs: An ISA, or Individual Savings Account, is a tax-free savings or investment account. You can save up to a maximum of £20,000 per tax year (currently 6th April 2022 to 5th April 2023) before paying tax on your savings. There are several different types of ISA to choose from, including cash ISAs, stocks and shares ISAs, Innovative Finance ISAs, a Lifetime ISA (providing you meet the criteria) and, for under-18s, a Junior ISA.
  • Help to save: Help to Save is a government-backed savings account designed to help low-income earners save.

Another common savings account type is a regular savings account that requires you to save a set amount each month. This may be ideal if you’re starting with a small amount rather than a lump sum. Some people also use their current accounts to save money, although this type of account rarely offers good rates of interest.

According to a 2019 survey, these are the most common ways to save in the UK:


What are fixed rate bonds?

Fixed rate bonds or fixed rate savings accounts offer guaranteed returns on your savings over a set term, typically between six months and five years.

Interest rates on fixed rate bonds are often better than standard or easy access savings accounts and are usually more competitive the longer your term is. If you have a lump sum of money that you want to grow and can afford to lock away, or if you’re working towards a long-term savings goal, fixed rate savings accounts might be right for you.

What are easy access savings accounts?

As the name suggests, easy access accounts have minimal restrictions and allow you to top-up or withdraw your money easily and at your convenience. Many people choose to use this type of account to build their emergency savings or start a ‘rainy day’ fund.

Typically, easy access accounts, also known as instant access accounts, offer variable interest rates, meaning that the rate could both increase and decrease. Some types of easy access savings accounts may impose a limit on the number of withdrawals you can make in a year (exceeding this figure could mean the interest rate drops considerably), so it’s important to read the small print before you sign up.

What are notice accounts?

A notice account is a type of savings account that requires you to provide notice to withdraw your savings. The notice period is typically between 30 and 90 days, but with some notice accounts, you’ll need to provide as much as 180 days’ notice before you can make a withdrawal.

Notice accounts could be right for you if you want to grow a lump sum of money that you might need access to at a future date of your choosing, such as if you’re planning to buy a house.

Where can I earn the highest interest on my money?

Putting your money into a high-interest savings account will help you to grow your wealth and reach your savings goals that much faster. The savings accounts that offer the highest rates of interest will differ and fluctuate in line with the Bank of England base rate, which is why it’s important to shop around. There are lots of comparison sites online or you can visit the table at the top of this page to compare high-interest savings accounts from a wide range of partner banks.

You may also want to consider a savings account with more restrictions, such as fixed rate bonds, as these types of accounts typically offer higher interest rates as a reward for locking away your cash. However, before you open this type of account, it’s important to assess your budget plan and financial circumstances so you know that you can definitely afford to tie your money up.

You could also think about investing, although you do need to be aware of the increased risks involved.

How does inflation affect savings?

As inflation rises, things get more expensive. For example, if the price of a £1 loaf of bread rises by 12p, the rate of bread inflation is 12%. This means your money has less buying power than it did before.

The BoE aims to keep inflation at 2%. However, the global surge in energy prices, the war in Ukraine, and the fallout from the Covid-19 pandemic have all pushed UK inflation well above this figure. As of December 2022, the CPI rate of inflation was 10.5%.

With inflation currently very high, it’s more important than ever to make the most of your savings. While there’s no guaranteed way to protect your money from the effects of inflation, opting for a high-interest savings account is usually a good place to start. At the very least, choosing a savings account with a competitive interest rate should help to mitigate the impact of rising prices.

You can also help to make your savings go further by taking advantage of any available tax breaks. If you’re a higher earner and aren’t entitled to the personal savings allowance, or if you have a considerable amount of savings, it’s worth considering tax-free savings accounts like ISAs.

Investing in the stock market can be another good way to grow your savings in times of high inflation, although it does come with considerable risks and it’s not suitable for everyone.

Compare savings interest rates at Raisin UK

Savings interest rates can vary considerably between providers so it’s essential to do your homework and seek out the best deals. Even what seems like a relatively small difference in interest rates can have a big impact on your savings and financial circumstances over the long term.

At Raisin UK, our marketplace is home to a wide range of high-interest savings accounts. Our fixed rate bonds tend to offer the best savings account interest rates, making them an ideal choice for long-term saving goals. However, if you prefer to have a degree of flexibility, notice accounts or easy access savings accounts may be a better option.

You’ll also have complete peace of mind as all of our savings accounts are protected under the Financial Services Compensation Scheme (or European equivalent). To get started, simply register for a free Raisin UK Account today.