This savings accounts FAQ answers every question you’ve ever had about savings accounts, ISAs, interest (and paying tax on interest), benefits, and more!
Will my savings be taxed?
The contents of your savings accounts won’t be taxed directly, but if your savings income (excluding ISAs) exceeds your personal savings allowance (read more below), it should be included on your tax return and taxed accordingly.
How safe are my savings?
If you’re saving in a bank with a UK banking licence, your savings (assuming they are not linked to the stock market) are protected by the Financial Service Compensation Scheme (FSCS).
The FSCS protects the first £85,000 of deposits held by a particular institution. However, you should always be aware that individual institutions may trade under multiple brands, and protection is not given per brand. Therefore, if you have £50,000 deposited in Bank A and £50,000 in Bank B, and they traded under the same banking licence, only the first £85,000 would be protected if the bank failed.
First Direct and HSBC are probably the best example of this: they are two brands operating under the same banking licence. The Bank of Ireland and the Post Office are part of the same group, too, as are Halifax and Bank of Scotland. To get the most protection, you should split your savings across multiple banking institutions.
It is also worth remembering that the FSCS only protects banks. If you are depositing with a peer-to-peer investment firm, you will gain no statutory protection whatsoever. You might be able to get some redress from an inhouse protection scheme, but this is discretionary and not as powerful as FSCS protection.
What is my Personal Savings Allowance?
New for the April 2016/2017 tax year, your personal savings allowance (PSA) lets you earn an amount of interest from non-ISA savings accounts without paying tax. If you’re a basic-rate taxpayer (20%) the tax-free threshold is £1,000, and if you pay the higher rate (40% or 41% in Scotland) of income tax you get £500 of interest tax-free. If you’re lucky enough be an additional rate taxpayer (45%) you get no personal savings allowance at all.
If your savings interest is greater than your PSA, you should declare this in your HMRC tax return.
Do savings accounts require credit checks?
You will not be declined for a savings product because you have a poor credit score. However, financial institutions have an obligation to help prevent money laundering and fraud, so they will need to confirm your identity before you can open an account, and many will use your credit file to do this.
Do savings accounts appear on my credit file?
The balance of your savings accounts is not recorded in your credit file. The checks to confirm your identity are recorded in your credit file, but they are not included in the information that potential lenders see when they search your file.
What does AER mean?
AER stands for Annual Equivalent Rate, which is meant to help you quickly compare the amount of interest you would get per year from a savings account.
AER shows what would be earned in interest, as a percentage, if money was deposited in a particular account for a full year. As such it takes account of compounding monthly interest payments as well as annual bonuses which might be paid.
AER is a very useful way to make quick direct comparisons between products, but you should remember that only products of the same type can be directly compared – don’t use AER to compare a cash ISA with an instant access savings account, for example.
Also bear in mind that there’s more to a savings account than just the rate of interest! You should consider how readily you will need to access your savings, whether you’ll be taxed on any interest, and other perks and caveats that might make one option better or worse than the other.
What is gross interest?
Gross interest is the annual interest you receive on an investment before tax. If the interest does not exceed your allowance, then your gross interest rate will be the same as your net interest rate (interest after tax), since no tax is charged.
If your savings interest exceeds your allowance, you will need to declare that in a tax return to HMRC.
What is compound interest?
According to urban legend, Albert Einstein once described compound interest as the eighth wonder of the world: it’s either hugely beneficial if you receive it, or a drag on your finances if you pay it.
In nutshell, compound interest is simply interest paid on interest. For example, if you deposited £500 in an account paying 5% annual interest, and made regular monthly payments of £50 for 18 years, you will have deposited £11,300. However, you will have saved a total of £18,536 – earning £7,236 interest, or £402 per year. That’s a return of over 50% on your annual contributions!
Do savings affect benefits?
With the plethora of benefits you can claim for, and the ever-changing benefit rates, the short answer to this very complicated question is yes. Whenever you are claiming for any means-tested state benefits, you will be asked about your savings on your application form, and you will need to be honest and include all the assets and capital you have (including any monies in your bank accounts, savings accounts or ISAs). Failure to do so could be considered fraudulent and the consequences could be severe.
Now read our guide on how to choose a savings account