Must-Read Financial Tips for 2025: Choose the Right Savings Account and Earn Money Effortlessly

Despite the Bank of England lowering its base rate, savings account returns still exceed inflation.

However, bond market forecasts suggest the Bank of England might further reduce interest rates in 2025, potentially dropping the base rate from 4.75% to around 4% by the end of next year. If true, savings rates could decrease even further.

To make the most of your savings before potential rate cuts, now is the time to act. Whether your goal is short-term or long-term savings, this guide will help you select the best savings account for maximum returns.

Types of savings accounts in the UK

Nearly all banks in the UK offer savings accounts, distinct from current accounts used for daily expenses. Here are the common types:

1. Regular Savings AccountsSave a fixed amount monthly for a set term (e.g. 12 months) and earn interest. These accounts help build a saving habit and often offer attractive rates. However, they may have limits on deposits or restrictions on withdrawals.

2. Easy Access Savings AccountsSimilar to current accounts, these allow quick access to funds, making them ideal for short-term goals. However, interest rates are variable and may fluctuate.

3. Fixed-Rate BondsLock your funds for a set term and earn a fixed interest rate. These provide certainty on returns but often impose penalties for early withdrawals.

4. Notice Savings AccountsRequire advance notice for withdrawals, offering higher rates than easy access accounts in return for reduced liquidity.

5. High-Interest Savings AccountsOffer competitive rates but often come with conditions, such as a high minimum deposit.

6. Children’s Savings AccountsDesigned for those under 18, these accounts can be a valuable tool for teaching financial skills.

7. Cash ISAs (Individual Savings Accounts)Tax-free savings with an annual allowance of £20,000. However, their returns may be lower compared to other account types.

8. Lifetime ISAs (LISAs)Tailored for first-time homebuyers or retirement savers, LISAs include a government bonus and an annual limit of £4,000.

   
   

Savings rates and bank options

For savings to grow in real terms, interest earned must exceed inflation. Since October 2023, UK savings rates have outpaced inflation, marking a good period for savers. However, rates have been gradually declining since mid-2024 as inflation rises.

According to the UK Office for National Statistics, October’s CPI inflation rate rose to 2.3% (up from 1.7% in September) and is expected to climb further, potentially reaching 2.75% by late 2025.

Concurrently, savings rates, influenced by the Bank of England’s base rate, are projected to decrease. Still, many banks offer savings rates above inflation. Acting quickly is essential to secure these favourable rates.

Recent recommendations from MoneySavingExpert (at the time of writing) include:

• Best Easy Access Accounts

  • Plum Cash ISA: 5.18%

  • Moneybox Cash ISA: 5.17%

  • Atom Bank: 4.85%

• Best Notice Accounts

  • Recognise Bank: 95-day notice, 4.95%

• Best Fixed-Term Accounts

  • Oxbury Bank: 3-month term, 4.8%

  • Habib Bank Zurich: 1-year term, 4.8%

  • Secure Trust Bank: 2-year term, 4.61%

  • DF Capital: 3-year term, 4.61%

    
    

Choosing a savings account

When opening a new savings account, consider the following factors:

1. Interest RatesA good rate is key to higher returns. Check for promotional rates, their duration, and any conditions like minimum deposits.

2. AccessibilityEvaluate your short-term cash needs. Easy access accounts are ideal for emergencies, while locking funds for longer periods may yield better rates.

3. Terms and ConditionsWatch for restrictions like minimum deposits, mandatory monthly contributions, or withdrawal penalties.

4. Tax ImplicationsMost UK savers don’t pay tax on interest due to the Personal Savings Allowance. However, if your interest exceeds this threshold, you may owe taxes.

5. ProtectionThe Financial Services Compensation Scheme (FSCS) protects deposits up to £85,000 per account. Consider diversifying funds across accounts if your savings exceed this limit.

   
   

Is savings interest tax-free?

Most people can earn some interest tax-free within the following allowances:

1. Personal AllowanceUnused personal allowance (typically £12,570) can be applied to savings interest.

2. Starting Rate for SavingsUp to £5,000 in tax-free interest is available, depending on your income. For every £1 above £17,570 in total income, the starting rate is reduced by £1.

   
   

Example:

1. • Salary: £16,000

   • Savings interest: £200

   • Taxable salary after personal allowance: £3,430

   • Remaining starting rate: £1,570 (£5,000 – £3,430)

   • Result: No tax on £200 interest.

2. Personal Savings AllowanceTax-free allowances depend on your tax band:

   • Basic rate: £1,000

   • Higher rate: £500

   • Additional rate: £0

     
     

Interest exceeding these thresholds is taxed at your income tax rate.

By carefully choosing the right savings account and acting promptly, you can make the most of your money in 2025, even amid changing economic conditions.

All information provided is up to date at the time of writing.  For up-to-date savings account details, we recommend checking directly with the financial institution in question or on MoneySavingExpert for up-to-date information.

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This article is intended as general guidance only, and does not replace any legal or professional advice.  For enquiries, please contact TBA Group via email or WhatsApp.