The New Year is traditionally a popular time to think about your savings goals, but it’s not always simple to work out the best place for your money.
With so many different types of accounts available, and several new savings deals being introduced, it’s easy to get confused.
Here, we explore the prospects of savings accounts, current accounts and the wide range of new Isas arriving on the market.
Make the most of your personal savings allowance
If you’re a basic rate or higher rate taxpayer, you’ll be given a new personal savings allowance from April 6 2016. This will reduce the amount of tax you pay on savings interest.
Basic rate taxpayers will pay no tax on the first £1,000 of savings interest they earn every tax year. Higher rate taxpayers will pay no tax on the first £500 of interest received.
This could impact your best savings options, as you’ll pay less tax on interest stored in savings accounts and current accounts.
Cash Isas vs savings accounts – an example
Imagine you’re a basic rate taxpayer with less than £50,000 in savings:
- Currently, a cash Isa paying 1.4% AER will earn you better returns than a savings account paying 1.5% AER, because you’ll pay 20% tax on interest using the latter.
- However, from April 6 2016, you’ll pay no tax on interest from either account (assuming you earn less than £1,000 of interest in the tax year), so the savings account would be the better option.
The Which? Money Compare savings and Isa tables let you search hundreds of savings accounts and Isas from providers large and small to find the best option for you.
Which? Money Compare table: savings accounts and Isas – hundreds of accounts compared
Current accounts offer the best returns on small balances
At today’s rates, current accounts offer the best returns to savers with £20,000 or less who want instant access to their funds.
You can earn 5% AER on balances up to £2,500 with the Nationwide FlexDirect account for the first 12 months (1% thereafter). You can earn 3% AER on balances between £3,000 and £20,000 with the Santander 123 current account.
You’ll have to adhere to the terms of a current account in order to earn interest. Many require a minimum monthly deposit, a minimum amount of direct debits or a monthly fee.
Interest earned from current accounts is currently subject to income tax, but those entitled to a personal savings allowance will pay less from April 6 2016.
Find out more: best current accounts if you’re always in credit – see our tables
Make the most of flexible Isas
From April 2016, you’ll be able withdraw and replace funds from a cash Isa without it counting towards your annual Isa limit.
These ‘flexible Isa’ rules were announced by the Chancellor in last year’s Budget.
The annual Isa limit for 2016-17 will remain at £15,240, and you’ll still only be able to put new funds into one new cash Isa and one new stocks and shares Isa.
Which? Money Compare table: instant-access Isas – hundreds of cash Isas compared
Consider an Innovative Finance Isa
From April 2016, you can invest money with peer-to-peer lending websites under a tax-free ‘Innovative Finance Isa’ wrapper.
Peer-to-peer lending websites match up those willing to lend money with those looking to borrow. As such, rates on offer for lenders tend to be higher than you’ll get from a traditional savings product.
But peer-to-peer is riskier – with a real possibility that borrowers will default on their loans.
Peer-to-peer websites aren’t covered by the Financial Services Compensation Scheme (FSCS) either, so you’ll have no protection if the website goes bust.
Find out more: peer-to-peer lending websites – we’ve reviewed the UK’s most popular companies
Help To Buy Isas for first-time buyers
Help to Buy Isas have been available since December 1 2015.
Many offer better rates than traditional instant-access Isas. Halifax currently offers the best deal on the market, paying 4% AER.
The government will top up Help to Buy Isa savings by an additional 25% towards your first property purchase, up to a maximum of £3,000. However, you can only top up these Isas with an initial maximum deposit of £1,000, followed by a maximum of £200 each month.
Find out more: what is a Help to Buy Isa? – our short video explains it all
- See our step-by-step to finding the best savings account
- Learn more about how to protect your savings with the FSCS
- Your savings query answered by calling the Which? Money Helpline
Which? Limited is an Introducer Appointed Representative of Which? Financial Services Limited, which is authorised and regulated by the Financial Conduct Authority (FRN 527029). Which? Mortgage Advisers and Which? Money Compare are trading names of Which? Financial Services Limited.