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Bank accounts for savers

With interest rates at record lows, we show you how to earn top interest rates and cashback from your current account.  

In this article
Switch to a bank account that rewards savers  Are current accounts safe for savings?
Do I owe tax on current account rewards? Link your bank account to your mortgage for superior savings

Switch to a bank account that rewards savers 

As interest rates continue to nosedive, savers have little to cheer about, but there are other ways to boost returns – you can turn to current accounts instead. 

Cash rewards are used as an incentive to open or retain a current account, largely because banks can cross-sell more profitable products, such as credit cards and mortgages. This means many providers are offering superior rates on balances held within a bank account, instead of traditional savings accounts. 

Around three quarters of current accounts pay no interest whatsoever, but a select few pay as much as 5%, albeit on restricted balances.

Switching to one of the best current accounts for interest is a simple way to boost your savings, although you will need to keep an eye on it going forward, in case your bank cuts the interest rate or changes the terms of the offer. 

A number of banks and building societies also offer cashback to attract new business. We highlight the best current accounts for cashback in our tables.

In some cases, you can earn a regular sum for meeting certain requirements, such as funding your account with a minimum amount each month, or paying out a number of direct debits. Other banks offer cashback on household bills (such as energy, water, mobile phone, home insurance, and even your mortgage) paid from your account. 

Are current accounts safe for savings?

Piling your cash into a current account seems like a no-brainer when traditional savings rates are so disappointing. But you will have to be disciplined if you want to avoid dipping into your savings.

Banks are covered by the Financial Services Compensation Scheme (FSCS) which means your savings are protected by the government up to £85,000 if a financial institution goes bust. If you have more than this in savings, spread your cash across different financial institutions to ensure your money is protected. Use our guide to who owns who in the savings market to make sure all of your money is protected. 

You may also feel nervous about online security and debit card fraud, particularly when current accounts such as Santander 123 attract interest on balances as high as £20,000. However, Santander has stated that security controls are consistent across all products and pointed out that having your current account raided is often easier to notice as they are reviewed more regularly through statements and online banking.

Do I owe tax on current account rewards?

Banks and building societies no longer deduct income tax from the interest they pay on savings accounts and current account. This is because basic-rate taxpayers can earn up to £1,000 in savings income (which includes interest from current accounts) tax-free under the personal savings allowance (PSA). Higher-rate taxpayers get a £500 allowance. 

This only covers savings income though – other rewards are paid as an incentive to open or retain an account so this isn't covered by the PSA and may therefore be taxable. 

Cashback and rewards based on your spending are tax free. However, the rules are more complicated for regular cash payments because some banks deduct basic-rate tax from any cash rewards, and others don't:

  • If your bank offers cash to switch your bank account this is not taxable.  
  • If your bank offers cashback for direct debit payments e.g. Santander 123/Barclays Blue Rewards this is also classified as a non-taxable discount. 
  • If your bank offers regular payments this is usually taxable. In some cases e.g. Danske Bank Reward this is paid without any tax being taken off so you should inform HMRC.
  • Other banks deduct basic-rate tax at source e.g. Halifax Reward/Co-op Bank Everyday Rewards so you don’t owe anything if you're a basic-rate taxpayer but higher and top-rate taxpayers will owe extra tax. 

If you're in any doubt, ask your bank whether you need to declare rewards to HMRC (you can do this on a self-assessment tax return, or by getting a new tax code). If you're a non-taxpayer you can reclaim any tax deducted by filling in an R40 form. 

Find out more: Current accounts and cash rewards – get to grips with tax rules for cashback

Link your bank account to your mortgage for superior savings

Offset mortgages make your money work harder. They don't pay any interest, but if you have a large amount of cash savings, you can offset that money against the total debt of your mortgage. 

These mortgages can be linked to a bank account or savings account with your mortgage lender so that you reduce the balance of your loan. 

If you have a £125,000 loan and £25,000 in linked savings, the bank will only charge you interest on the difference (£100,000). There is no tax to pay on the interest you save. 

You can choose to either pay lower monthly mortgage payments, or some lenders let you continue to pay interest on the full amount so that you overpay every month and therefore clear your mortgage quicker.

Offset mortgages can be more expensive than normal mortgages, but you should be better off if your mortgage rate is higher than your savings rate. 

Find out more: What is an offset mortgage? – discover if this could work for you