Understanding easy access savings accounts

Some easy access and instant access savings accounts pay interest once a year, usually on a set date or the anniversary of the opening of your account. Others, however, pay interest on a monthly or quarterly basis. Exactly how interest is calculated depends on the particular account you have and your chosen provider, so it’s worth checking this before you open your account.

When you’re comparing high-interest instant access accounts, it’s also important to check how often interest is compounded and to note that there’s a difference between the AER and the gross interest rate.

The AER, or annual equivalent rate, is the interest rate most commonly used to make comparisons between savings accounts because it allows you to see how much interest you’ll earn over a full year. Unlike the gross interest rate, it takes into account other factors such as bonuses, compounding and bank charges.

Some easy access accounts might give you the option to have the interest added to your savings or paid directly into a nominated account.

Most easy access savings accounts offer variable interest rates, meaning that the interest rate you receive could increase or decrease.

There are several reasons why the interest rate on your easy access savings account may change, but it typically fluctuates in line with the Bank of England’s base rate. This means that a lot of economic factors come into play when determining interest rates. A provider may also alter their rate when a competitor bank or building society changes theirs.

Because of this, it’s worth comparing interest rates on easy access accounts to find one with the highest interest rate right now.

To find the best easy access account interest rates, you’ll need to compare accounts from a range of different providers. There are lots of comparison tools online, or you can visit the table at the top of this page to compare high-interest easy access accounts on the Raisin UK marketplace.

You may find that the best easy access interest rates are offered on accounts that impose certain restrictions. Although most easy access accounts allow you to top up and take out money at your convenience, some banks may restrict the number of withdrawals you can make in return for a competitive interest rate.

When you’re searching for the best easy access interest rates, it’s also worth considering the effect of compounding. Arguably, the best easy access and instant access savings accounts are those that compound interest on a regular basis, as they can help you to grow your savings faster.

Don’t forget that both easy access savings accounts and instant access savings accounts pay a variable interest rate, which means it could fluctuate. It’s important to read the terms and conditions carefully as some introductory offers, for example, a high interest rate, may expire after a set period. Some banks may also move you onto a lower interest rate if your balance drops below a certain level.

The amount of tax you pay on interest from your savings depends on how much you earn, but don’t worry, most savers don’t pay tax on their savings. 

Low earners with a total taxable income of less than £17,570 can earn up to £5,000 in interest before paying tax. This is known as the 0% tax ‘starting rate’. This rate decreases for every £1 you earn over your personal income tax allowance of £12,570 (2023/24 tax year).

What’s more, thanks to the personal savings allowance (PSA), basic rate (20%) taxpayers can earn up to £1,000 tax-free interest, while higher rate (40%) taxpayers can earn up to £500 per year. Additional rate (45%) taxpayers don’t receive a PSA, meaning you’ll need to pay tax on any interest earned.

Although many people won’t have to pay tax on the interest they earn in an easy access savings account, recent increases in interest rates could mean that more savers may reach or exceed their PSA. This is one of the reasons why it’s important to review your savings strategy regularly.

If you do exceed your PSA (or you aren’t eligible for it), you’ll need to declare it. Any interest that exceeds your PSA will be taxed at your usual rate of income tax. If this applies to you, you may want to consider utilising tax-free saving accounts like ISAs.