Ask most people where their savings are and the answer is "in the savings account that came with my current account". Same bank, same app, opened years ago and never looked at again.
That's loyalty, and banks don't reward it. The savings account attached to your current account is often one of the worst-paying ones the bank has, because they know most people won't bother moving their money.
It's the same rule as Borrowing Without the Bite, just the other way round. When you borrow, you shop around for the lowest rate. When you save, you shop around for the highest one.
What I Do
When my long-term money isn't invested, it sits in the highest-paying easy-access account I can find.
Right now, I've got about £5,000 put aside for the plumbers fitting my new bathroom. I need it available whenever they want paying, so it's in an easy-access saver with a bank I don't do my everyday banking with, paying 4.5% thanks to a 12-month boosted rate. Having it somewhere different doesn't matter: moving money between them takes seconds.
I don't use fixed-rate accounts. I like being able to take my money out whenever I want without a penalty, and for me that's worth more than the slightly higher rate a fix might pay. That's a personal choice, though, and plenty of people are better off fixing (more on that below).
Once the renovation costs calm down, my plan is to put around £100 a month into my Lifetime ISA to build an extra retirement pot, and invest the rest.
And I've never paid tax on my savings, because I've almost always kept them in an ISA. That's become more important than most people realise, and I'll explain why further down.
Pick the Account That Fits the Job
There's no single "best" savings account. The right one depends on when you might need the money. Work that out first, then shop around for the best rate on that type of account.
Easy Access
Pay in and take out whenever you like, with no notice and no penalty. This is where your emergency fund belongs, along with money for anything coming up soon, like my bathroom.
Watch out for: some accounts limit how many withdrawals you can make a year, and drop the rate if you go over.
Cash ISAs
Any of these account types can come as a cash ISA, so the interest is completely tax-free. Some easy-access cash ISAs let you withdraw instantly, while others take a day or two, so check before you open one if speed matters.
A "flexible" ISA lets you take money out and put it back in the same tax year without it eating into your allowance. Not all cash ISAs are flexible, so check that too.
Notice Accounts
You give notice before you withdraw, often 30, 60 or 95 days, and get a better rate in return. They suit money you won't need in a hurry but don't want to lock away completely.
Fixed-Rate Bonds
You lock your money away for a set time, often one to five years, at a guaranteed rate. If you know for certain you won't need it until a particular date, a fix can pay more than easy access, and the rate can't drop on you.
Watch out for: many fixes don't let you withdraw at all until the end, and the ones that do usually charge a penalty.
Regular Savers
These often have the highest headline rates, but you can only pay in a set amount each month, usually up to a few hundred pounds. Because the balance builds up gradually, you earn roughly half the headline rate in interest over the year. They're good for building a habit, but don't compare them like-for-like with a lump-sum rate.
Premium Bonds and the LISA
Premium Bonds pay prizes rather than interest, and any winnings are tax-free. Your money is 100% backed by the government, but you might win nothing at all. There's more on them in The Long March.
A Lifetime ISA adds a 25% government bonus to what you pay in, for a first home or for retirement from age 60, but there's a 25% penalty if you withdraw for anything else. It's for long-term money, not savings you might need. From Grott to Gaff covers using it for a deposit, and the LISA Bonus Calculator shows what the bonus adds up to.
How to Shop Around
- Compare the AER. The Annual Equivalent Rate shows what you'd earn over a year, so you can compare accounts that pay interest monthly with ones that pay yearly.
- Check whether the rate includes a bonus. Lots of top rates are boosted for the first few months or year, then drop. Mine is one of them.
- Set a calendar reminder for when the bonus ends, the same trick I use for 0% credit cards in The 0% Shuffle. When it drops, move the money.
- Use comparison sites and best-buy tables rather than just your own bank's app.
- Don't be put off by a name you don't recognise. If it's a UK-authorised bank, building society or credit union, your money is protected by the FSCS up to £120,000 per person, per firm. Some brands share a banking licence, and the protection is per licence, not per brand, so if you have more than £120,000 saved, check which banks share one.
Credit unions are worth a look too. If you're with one of the forces credit unions, you can save straight from your pay, and your savings get the same FSCS protection.
The Tax Bit Most People Miss
Interest on savings outside an ISA counts as taxable income. Most people are covered by the Personal Savings Allowance:
- Basic-rate taxpayers: the first £1,000 of interest a year is tax-free.
- Higher-rate taxpayers: only the first £500.
That used to be plenty. With decent rates, it isn't any more. At 4.5%, around £22,000 in savings earns £1,000 a year in interest, and a higher-rate taxpayer would use up their £500 allowance with about £11,000. A healthy emergency fund, a deployment's worth of savings or money put aside for a house can easily go over that.
Anything above the allowance is taxed at your income tax rate, and from April 2027 the rate on savings interest goes up by 2 percentage points (for example, from 20% to 22% for basic-rate taxpayers).
Interest also counts in the tax year it's paid. A fixed-rate bond that pays all its interest at the end can drop several years' worth into one year, and push you over the allowance.
The simple fix is to keep your savings in a cash ISA, where the interest is tax-free whatever the amount. That's what I do.
What's Changing With Cash ISAs
You can currently put up to £20,000 a year into ISAs, split however you like between cash, stocks and shares, and Lifetime ISAs (up to £4,000 of it in a LISA).
From 6 April 2027, if you're under 65, you'll only be able to put up to £12,000 a year of that into cash ISAs. The other £8,000 can still go into stocks and shares. If you've got a lot of cash to shelter, it's worth using this year's full allowance while you can.
The Bottom Line
Work out when you might need the money, pick the type of account that fits, then find the best rate for it, not just whatever your bank offers. Keep it in an ISA if you can, and set a reminder for when any bonus rate ends.
It takes ten minutes, and the difference between a rubbish rate and a good one on a few thousand pounds is real money every year, for doing nothing at all.
New to all this? Start with Common Sense Isn't That Common, which covers building an emergency fund before anything else.
This is based on personal experience and is for information only. It is not financial advice. Rates mentioned were correct when written and change often. Tax treatment depends on your individual circumstances.
Sources
Deposit protection limit — FSCS
Tax on savings interest — GOV.UK