best saving account in UK

Now is the perfect time to think about your new saving account in the UK.

Opening a saving account in the UK is not only for those with a big budget. And there are many reasons why you should do it sooner rather than later.

Before we dive into the ins and outs of your next saving account in UK, I want to clarify I am no financial advisor. What is outlined below is my understanding of the topic and the article reflects my personal view. As with everything, please do your research and if in doubt please contact an independent financial advisor.

Look for independent financial advisors in your area here

Why you should open a saving account

There are so many reasons why you should open a saving account in the UK. Here are some of the most common:

  • A life event – for example a wedding or a big holiday
  • For emergencies or rainy days – just in case something happens and we need to face extra costs we didn’t budget for

Need help with budgeting? Check out this post with my budgeting strategy

  • Children – both to cover the time we might spend off work, but also all the bits and bobs the tiny humans need
  • Buying a house – a deposit and all additional expenses linked to this amazing adventure

Are you considering purchasing a new home? What a great news! Before you start this journey, make sure you read my full house buying guide with detailed step by step process, full breakdown of cost, and lessons we learnt from buying our first home)

Why you should do it now

There are two big reasons why you should open a saving account in the UK now.

It’s a good idea

I know this doesn’t sound like a very strong argument, but you should trust me, it’s a good idea. The best idea, actually.

Even if you are not planning any of the above, it’s always good to have some money on the side should the unexpected happen.

Having some savings give you freedom to do what you want and face anything that life throws at you.

This reminds me of one of my favourite quote:

When I look at my savings account, I don’t see pounds and pence, I see freedom” – Merryn Somerset Webb

An exception

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The exception to this rule is if you have debts.

In this case, you might want to pay off your debt(s) first.

How do you choose, you’d ask?

Well, it all depends on the interest rate and your personal preference.

If your debt interest rate is higher than the interest you might get in a saving account, you should pay the debt first. If you have a 0% interest loan, you can be confident opening a saving account makes sense financially.

Now, some people are more comfortable with having and managing debt, and some others really struggle and want to get rid of it as soon as possible. If that’s you, then it makes sense to pay off your debt first.

How to deal with finances is such a personal decision you should always do what feels best for you.

The personal savings allowance

Every year in the UK we get a personal savings allowance, which means you won’t have to pay taxes on the money you make from the interest of your savings.

With this allowance, you will earn up to £1,000 interest tax free if you are a basic rate tax payer, or £500 if you are a higher rate taxpayer. If you’re super rich and make more than £150,000 a year you won’t benefit from this allowance and you’ll have to pay interest.

For the majority of working people, who are basic rate taxpayers, this is great news. The bank you have the savings account with, will just pay all interest gross, and that money will stay in your pockets.

What’s even better is that if you open an ISA (Individual Savings Account) you get even more tax free money!

Let me explain

ISA (Individual Savings Account)

What is an ISA?

An ISA is a saving account where you can save up to £20,000 per year and you won’t pay taxes on any interest you make. Every April, when the new financial year start, you get a new £20k allowance.

For example,

In the financial year 2019/2020 you have saved £15,000. You have not used up all your allowance for the year and you will lose the difference (£5,000 in our example). But on 6th April, you get a new allowance of £20,000 tax free. And that is on top of what you already have, so you could end up with £30,000 in savings tax free!

Whilst the tax free benefits start in April, and where possible it is a great idea to make the most of the allowance, nothing stops you from opening an an ISA later in the year.

Also, anything you save in an ISA won’t count towards your personal saving allowance.

It is basically the government’s attempt to make us save more, thank you very much HMRC.

There are various types of ISAs:

Cash ISA

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They are basically standard savings account.

The interest rate varies depending if you want immediate access to it (can withdraw all your money at any time) or if you’re willing to lock your money for a while or reduce the amount of withdrawals permitted.

Cash ISAs are offered by most banks and building societies, so there is plenty of choice and remember there is no need to open one with your current bank.

High street banks often offer the lowest rates, and given your money are totally safe and protected should anything happen to the provider, you should definitely shop around for the best deal!

Stock and Shares ISA

This type of ISA allows you to invest in the stock market: individual companies, investment funds and bonds.

This ISA is offered by stock brokers and online platforms, and you could be as involved as you want, starting from a DIY approach where you decide what to buy and when to a fully managed service by a broker or an online platform where they manage everything on your behalf, based on your attitude towards risk.

Unlike Cash ISA, with Stock and Shares ISA your capital is at risk and you could get back less than you invested.

It is known to be a long term strategy, as the longer you leave your money invested the easier it is to recover from the market fluctuations.

Innovative finance ISA

As the name suggests, this is the newest type of ISA around, and it allows peer-to-peer (P2P) investing or crowdfunding. Similarly to the Stock and Shares ISA, your capital is at risk.

Traditionally P2P investing is seen as even riskier than Stock and Shares ISA, but the returns could be higher.

Lifetime ISA

Also called Lisa, this can be opened by anyone between 18 and 40 years old, and contributions can be made up to the age of 50. They can be either cash or stock and shares, but there is an annual limit of £4,000 you can deposit.

The main benefit of this ISA is that the government will add 25% bonus, up to £1,000 a year. However, to get the bonus you must use the money to buy your first house or wait until you’re 60.

If you’re planning to buy a house, Lisas can be a great help (along with my home buyer guide…), but if you’re looking to save for retirement there are loads of options to look into, such as pensions (both personal and through your employer).

Junior ISA

You can open one for children under 18. This type of ISA is different from the above as the limit you can deposit per financial year is £4,368 (for 2019/2020 tax year)

Which one to choose?

As mentioned at the beginning I am not a financial advisor so I am not in a position to advise which is the best for your individual circumstances.

One recommendation would be to consider the reason for your savings and when you will likely need your money back. Your attitude toward risk should also play a part in your decision making.

Regardless of which ISA you decide to open, make sure you do it and always keep in mind what you are saving for.

Comment below what is your main saving goal?