How to make the most money from savings.
First up, I’m writing this mainly for people with some savings but not a ridiculous amount. We’re talking under £30,000 (still a very decent amount) but more than a few hundred quid.
I think that’s probably most of you who read the blog. This post also doesn’t deal with investments or other ways to earn extra from your savings. This is purely about cash savings, getting the best deal you can and a new rule which means you’ll be getting to keep all of the interest you earn.
The best way to earn interest on your savings
Though ISAs offer tax-free interest, your best bet for savings in the last couple of years has been to pick one of the top current accounts which offer a higher rate of interest.
The interest rates available are much higher than other types of savings account, though there are some limitations. Most of these accounts have a cap on how much you can earn interest on, and then the interest is taxed at 20%.
So the maximum £2,500 earning 5% in a Nationwide FlexDirect account would make you £100 after twelve months. If you earn more than £43,000*, that drops to £75 as you’ll be paying 40% in tax.
But that’s still better than having an ISA paying 1.5%. Even though this interest is tax-free, the low rates mean you’d only make £37.50 in a year on the same level of savings.
The new Personal Savings Allowance rule
From 6th April anyone who earns under £43,000 a year can earn £1,000 in interest each year and NOT pay tax on it! If you earn more than this, your “Personal Savings Allowance” is reduced to £500. Still pretty decent.
This isn’t just on ISA savings. In fact, it’s on top of ISA savings. So essentially any interest you make on your savings and other investments.
This means your £2,500 saved in Nationwide will get you £125 a year, and you’d still be able to earn another £875 in interest before you start paying tax on any interest.
How to make £1,000 interest on £29,200 savings
To earn £1,000 in interest you need a lot of savings. If you put your money in a low paying account (say 1.5%), you’d need £66,000!!
But you can earn the full £1,000 personal savings allowance on less. I’ve worked out that you can put away a total of £29,200 in four top current accounts before hitting the £1,000 mark.
Here’s what I would do if I had that amount:
Put the first £2,500 in a Nationwide FlexDirect account earning 5%
This rate is only valid for the first year but it’s the most you can make, so I think it’s the best place to start. You’ll earn £125 in interest.
Then £2,000 in a TSB Classic earning 5%
This account will earn you £100 a year as long as you keep the balance at £2,000. You can also get 5% cashback on the first £100 you spend contactlessly.
The next £5,000 can go in a Lloyds Club account at 4%
After the smaller chunks you can put in £5,000 and earn yourself £200. I imagine these first three accounts will be more than enough for most people.
After that you can put £20,000 in the Santander 123 account at 3%
Though any balances over £3,000 and less than £20,000 will earn 3% interest, there is a £5 a month fee. However the cashback on bills should hopefully cover most of that, meaning you’d get £600 on the full amount.
The interest from these four accounts adds up to £1,025, but save £19,200 in the Santander account and it brings you to just £1 over the new tax-free allowance. It works out as average rate of around 3.4%. That’s far better than what you can currently get in an ISA or other savings account.
What about if you don’t have £30,000 in savings?
Thirty grand is a lot of money, and if you don’t have that it doesn’t mean you can’t still take advantage of the new rules and high interest in current accounts.
First pick one of the accounts above based on what you do have. Then, if you think you can save a little every month, a “regular saving accounts” will help you carry on getting some fantastic interest rates.
A regular saver account allow you to put a max in each month, usually between £200 and £300 for a year. At the end of the 12 months you get the interest paid out and the account closes.
My top picks each require you to have a current account with them, which is why I’ve chosen this order:
Nationwide 5% Flexclusive Regular Saver
You can save £500 a month here, so that’s potentially £6,000 saved in a year earning £139, on top of the money saved in the FlexDirect account. You can miss a monthly payment here and you can move money back to your Nationwide current account if you need to.
TSB 5% Regular Saver
Similar to the Nationwide regular saver, but with a maximum monthly deposit of £250.
First Direct 6% Regular Saver
This one lets you save £300 a month, so if you pay in the full amount each month, at the end of the year you’ll earn £100. You can’t miss months but and you can’t withdraw the cash.
>> You can also get cash bonuses and other extras from switching your current account. Here’s what’s currently on offer
What about savings over £30,000?
If you’re lucky enough to have more than £30,000 and you’ve filled the accounts above, you’re probably best looking at an ISA for the remaining savings.
The interest rates are currently still pretty low, but you can earn this interest tax-free, even once you’ve filled your personal savings allowance. You can also open a new ISA each financial year to keep earning more tax-free interest.
* £43,000 is the earning level for the higher tax rate from 6th April 2016.