Savings accounts: Frequently asked questions

Find the answers to all your savings account questions in this FAQ guide.

Are savings taxed?

You're not taxed directly on the contents of your savings account. But if the interest you earn on those savings exceeds your personal savings allowance (see below), then that income is taxed. The rules are different for cash ISAs. You'd need to include this income on your tax return to be taxed accordingly.

How safe are my savings?

Most UK banks and building societies operate under FCA regulations. These institutions protect up to £85,000 of your savings thanks to the Financial Service Compensation Scheme (FSCS).

But individual institutions sometimes run a few bank brands. For example, HSBC runs both HSBC and First Direct.

You only get the £85,000 protection per institution, not brand. So if you have £50,000 in First Direct and £50,000 in HSBC, you'd only be protected for the first £85,000.

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, split your savings across a few banking institutions.

It is also worth remembering that the FSCS only protects banks. If you save with a peer-to-peer investment firm, you will not get any statutory protection. You may get some redress from an in-house protection scheme, but it's discretionary and less powerful than FSCS protection.

What is my Personal Savings Allowance?

The government introduced the Personal Savings Allowance (PSA) on 6th April 2016. It allows for you to earn an amount of interest from non-ISA savings accounts without paying tax.

As a basic rate taxpayer (20%), the tax-free threshold is £1,000. For higher rate (40% or 41% in Scotland) taxpayers, only £500 of interest is tax-free. Additional rate taxpayers (45%) do not get a personal savings allowance.

If your savings interest is greater than your PSA, you must declare it on your HMRC tax return.

Do savings accounts require credit checks?

Savings accounts do not require credit checks, but your bank may do one to confirm your identity. This is to prevent money laundering and fraud.

You will not be declined for a savings product because you have a poor credit score.

Do savings appear on my credit file?

The balance of your savings accounts is not recorded in your credit file. Any checks to confirm your identity are recorded in your credit file. But potential lenders will not see them when they search your file.

What does AER mean?

AER stands for Annual Equivalent Rate. It's intended to help you compare the amount of interest you would get per year from a savings account.

AER shows what interest you'd earn, as a percentage, if you deposited money in a particular account for a full year. It takes account of compounding monthly interest payments and any potential annual bonuses.

AER is a useful way to make quick direct comparisons between products. But you can only use it to compare like for like products. Do not 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. Consider how much you'll need to access your savings and whether you’ll be taxed on any interest. Look at all the 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, you'll not lose any to tax. In that instance, your gross interest rate and net interest rate (interest after tax) will be the same.

If your savings interest exceeds your allowance, you will need to declare that in a tax return to HMRC.

What is compound interest?

In nutshell, compound interest is the interest paid on interest. For example, if you deposited £500 in an account paying 5% annual interest, and paid in £50 each month for 18 years, you'll have deposited £11,300. But the total amount saved will be much higher: £18,536, because you'll have earned £7,236 interest, or £402 per year. That's over a 50% return on your annual contributions.

Compound interest also applies to debt. If you're charged 5% interest on a £500 debt and you do not pay it, you'll get further and further into debt.

Albert Einstein labelled compound interest, "the eighth wonder of the world". He said: "He who understands it earns it; he who doesn't pays it. In other words, it's hugely beneficial if you receive it, but a drag on your finances if you have to pay it.

Do savings affect benefits?

Savings affect certain benefits. These are known as means-tested benefits. How much money you already have impacts how much you'll get in benefits.

When you apply for these benefits, such as Universal Credit for example, you'll need to state your assets and capital. This includes any monies in your bank accounts, savings accounts or ISAs. Failure to do so could be considered fraudulent and the consequences could be severe.

Savings should not affect non means-tested benefits.

21 October 2020