We use cookies to allow us and selected partners to improve your experience and our advertising. By continuing to browse you consent to our use of cookies. You can understand more and change your cookies preferences here.


When you click on a retailer link on our site, we may earn affiliate commission to help fund our not-for-profit mission.Find out more.

21 May 2020

Santander to slash 123 Current Account interest rate again: should you switch?

The account will offer far less than the best interest rates on the market but it does pay cashback on bills

Santander is cutting the interest rate on its 123 Current Account again, reducing it from 1% to 0.6% AER from 3 August.

This is the second reduction to be announced in three months and means Santander will have knocked 0.9% off its 123 account interest rate since the start of May.

These cuts come on top of another blow for account holders on 5 May, when cashback on selected household bills - which was previously unlimited - was capped at £5 per category.

Yet the account's high £5 monthly fee remains untouched.

As the Santander 123 is the only current account to combine in-credit interest with cashback on essential bills, many customers have been left wondering whether to stick with it or move away.

Here, we reveal what the account will really give you from August and explain some of the best alternatives depending on your situation.

Be more money savvy

Get a firmer grip on your finances with the expert tips in our Money newsletter – it's free weekly.

This newsletter delivers free money-related content, along with other information about Which? Group products and services. Unsubscribe whenever you want. Your data will be processed in accordance with our Privacy policy

What do the changes mean for 123 account holders?

The most a customer can earn in pre-tax interest over a year from August will drop from £200 to £120.

With the new cashback ceiling, the maximum an account holder can earn in cashback is £15 a month, or £180 a year. The cashback categories and tiers are as follows:

  • Water, council tax and Santander home mortgages: 1%
  • Gas, electricity, and Santander home and life insurance: 2%
  • Mobile and home phone bills, broadband and paid-for TV: 3%

This means, after annual fees of £60, the most you could possibly earn from the 123 account would be £240 in a year, but many won't achieve this - and those who do could potentially earn more with a savings account.

So, how do you net the maximum £240? Your balance will need to stay at £20,000 or more and you'll have to spend £917 a month across all three cashback categories, with £500 in the 1% tier, £250 in the 2% tier and £166.65 in the 3% tier.

But £20,000 is a high minimum balance to keep in a current account across 12 months. With that amount, you could make the same £240 a year or close via an easy-access savings account if you act quickly and catch one that pays almost double the 0.6% interest of the 123 Current Account.

Better still, you could be certain of outstripping it with a one-year fixed savings account paying more than double.

And even if you have hefty household bills, you can only max out the cashback if your bills are high enough in each of the individual categories - tricky if you don't happen to have Santander mortgage or insurance products.

It is becoming harder to cover the fees

The cashback cap and interest rate cuts will make it harder to cover the £5 monthly account fee.

To cover the fee through cashback alone, you'll need to spend between £167 and £500 depending on your qualifying spend in each tier.

And using interest alone, you'll need to keep a minimum balance of £10,033 across the year.

In reality, most people's fees will be covered by a combination of interest and cashback. For example, interest on a balance of £1,500 across the year, plus nearly £5 in monthly cashback, will do the job.

To find out what your gain or loss will be in August after cashback, interest and fees, you can use Santander's calculator.

Santander says that even after the August rate cut, the majority of 123 customers will earn enough in cashback and interest to offset the fees.

But 3% of customers are likely to be worse off from August, according to the bank. It makes sense for those people in particular to start shopping around for alternatives.

What are the alternatives to the 123?

Whether you keep a large float or a minimal one in your 123 Current Account, you could stand to gain more by splitting your money between a savings account and a rival interest-bearing current account.

Six bank accounts currently offer higher interest than the Santander 123 will from August, provided you maintain a balance of £1,000 or more. Three offer as much as 1.4% AER more.

The accounts below only pay interest on balances up to a set amount, so it's important to store anything above what you need to cover outgoings in a savings account.

Which current accounts offer the best interest on a £1,500 balance?

Bank accountInterestMaximum earnings in one yearYear's interest on £1,500Minimum funding per month
Nationwide FlexDirect2% on balances up to £1,500£30 interest£30£1,000
Clydesdale Bank Virgin Money Current Account2.02% on balances up to £1,000£20 interest£20£0
Yorkshire Bank Virgin Money Current Account2.02% on balances up to £1,000£20 interest£20£0
TSB Classic Plus1.5% on balances up to £1,500£22 interest£22£500
Santander 1230.6% from 3 August 2020 on balances up to £20,000£240 interest and cashback less fees£9, but you'll also pay £60 in fees£500
Bank of Scotland with Vantage1% on balances up to £3,999; 2% on balances between £4,000 and £5,000£40£15£1,000
Lloyds Bank Club Account1% on balances up to £3,999; 2% on balances between £4,000 and £5,000£40£15£1,500

Figures rounded to the nearest pound.

Use the switch service to help set up your new current account

The thought of changing accounts can seem like a hassle, but the Current Account Switch Service (CASS) makes the process much easier than it used to be.

CASS can help you in closing the 123 account, ensuring there are no more fees to be paid, and setting up a new one with a different provider.

It does this by moving all your regular incoming payments such as salary across as well as all your standing orders and direct debits.

What are my options if I stay with Santander?

If you don't want to leave Santander, you might want to consider the 123 Lite account. This costs £1, rather than £5, per month, and pays cashback but no interest.

You can cover the £12 yearly fee by spending between £33.33 and £100 a month, depending on which tiers your bills fall into.

It's paper-free, so you can only get your statements online. You have to log in to your account at least once every three months either online or via mobile banking.

Please note that the information in this article is for information purposes only and does not constitute advice. Please refer to the particular terms and conditions of a provider before committing to any financial products.