For people holding cash in a low- or no-interest account who want to earn a competitive rate without taking market risk. The case is simple: leaving £20,000 in a 1% account instead of a 4.5% one costs you hundreds of pounds a year for ten minutes' effort. This guide covers how to compare accounts, the tax on interest, and the safety limits. For the tax-free wrapper alternative, see the tax-free savings (ISA) guide.
Compare by AER, not by headline rate
The Annual Equivalent Rate (AER) factors in how often interest is compounded, so it is the honest basis for comparison between accounts. A 4.5% AER easy-access account and a 5% AER fixed bond are directly comparable on AER, even though they pay interest differently.
Three account types, three trade-offs
| Account | Typical rate | Access | Best for |
|---|---|---|---|
| Easy access | Variable, ~4–5% | Instant | Emergency funds |
| Notice account | Variable, slightly higher | 30–120 days' notice | Funds you won't need suddenly |
| Fixed-rate bond | Fixed, often highest | Locked for the term | Money tied to a known date |
Rates shown are illustrative — they track the Bank of England base rate and move constantly. Never lock your emergency fund in a multi-year fixed bond.
The tax on savings interest
Most people do not pay tax on savings interest thanks to the Personal Savings Allowance:
- Basic-rate payers: first £1,000 of interest tax-free.
- Higher-rate payers: first £500 tax-free.
- Additional-rate payers: no allowance.
Above the allowance, HMRC usually collects the tax automatically by adjusting your tax code — you rarely need to file a return just for savings interest. A large balance at a good rate can push you over: £25,000 at 5% earns £1,250, so a basic-rate payer would owe tax on £250. Moving some cash into an ISA removes that exposure entirely. See GOV.UK: Tax on savings interest.
Safety: the £85,000 limit
Money in a UK-regulated bank or building society is protected by the Financial Services Compensation Scheme (FSCS) up to £85,000 per person, per banking licence. If you hold more than that in cash, spread it across institutions with separate licences — note that some brands share a licence (e.g. NatWest and Royal Bank of Scotland), so check the FSCS register.
Worked example: £20,000 moved from 1% to 4.5%
- At 1%: £200 interest in a year.
- At 4.5%: £900 interest in a year.
- Difference: £700 of risk-free return for ten minutes' work.
When chasing rates stops being worth it
For small balances, the gain from switching every few months is tiny and the admin is real. A reasonable approach: pick a competitive easy-access account, move once a year if the rate has fallen well below the market, and use a fixed bond only for money with a known future date. Project the growth with the Compound Interest Calculator. Consumer guidance at FCA: Consumers.
Written and maintained by Shaun da Silva, Finance Consultant. Learn how we ensure accuracy and quality in our Editorial Policy.