Most people start saving with a deposit account – with a decent interest rate – from their favourite bank or building society.
They know how much is going in and they can rely on how much they will get back.
On this page, we explain how these accounts work and what to expect from them.
What better place to start than a savings account?
A deposit savings account is a very simple account offered by a bank or building society. They accept small and irregular amounts of money, the capital value of which is guaranteed. You then receive interest on that capital as your reward for leaving it untouched for a pre-agreed period of time.
This simplicity, combined with those guarantees, makes them very attractive, particularly as you start on your savings journey. You can see how much is going in, you always know how much is there and you can get at the money quickly if your circumstances change and you need to get it back.
The rate of interest paid on any individual deposit savings account is generally governed by the Bank of England Base Rate. If that Base Rate is low – as it is at the moment – the rate of interest you receive will also be low. If that Base Rate improves, the interest you receive on deposit savings will generally also improve.
However, between institutions, even though the Base Rate they all work to is fixed, there will be differences in the interest rate each decides they can afford to offer – and the circumstances in which they will do so. The key to making the most of your own savings pot is to find the best rate available for the amount of money you have available. The ‘Best Buy’ tables, both in Sunday newspapers and online comparison sites are a good place to start.
However, even when you have found the best rate, it is a good idea to keep checking it. Rates change frequently on these accounts and what is best one week might soon be less than great. Thankfully, if you do find your bank has significantly reduced its rate on your account – or another bank appears with a better rate – it is generally not too difficult to move your money around.
The money you place in your deposit savings account is treated as capital. It never rises in value and that amount will also be guaranteed. There is therefore no tax to pay on that capital, regardless of whether you leave it in the account or when take it out.
The interest that capital earns, however, can be taxable – at (up to) your own marginal rate of income tax.
Since the introduction of the Personal Savings Allowance, no tax is deducted from your interest by the bank. You are able to receive interest up to the value of that Savings Allowance free of any further tax – and at its current levels (see our tax guides) it is sufficient to remove most of us from the need to pay additional tax on savings completely.
However, if you are a higher or highest rate taxpayer, that Personal Savings Allowance is halved, or removed altogether. And, even if you are a basic rate tax payer, if you have a significant amount of money on deposit, your interest may exceed it. In this case, you will have more tax to pay – and that will usually be calculated for you as part of your annual self-assessment tax return.
If an institution with which you hold deposit savings is declared insolvent, the capital will be guaranteed by the Financial Services Compensation Scheme up to a maximum of £85,000 per person, per institution. If you hold more than £85,000 on deposit, therefore, it may be sensible to spread it across more than one institution.
There are circumstances in which those earning less than the tax threshold can continue to get interest tax free even if the interest they receive on savings takes them over the basic rate threshold.
If you’re looking at generating some income from your cash, have a look at how we manage investment accounts.
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