Santander UK has increased the rate on its flagship 123 accounts, as competition between providers ramps up.
The annual in-credit interest rate on the 123, Select and Private current accounts has increased to 1.75% on balances up to £20,000, from 1.50%.
The new rate of interest will automatically apply from Tuesday, meaning customers can now earn up to £347.22 in interest per year, in addition to any cashback they earn on selected household bills paid by direct debit.
The previous rate was 1.50% and it has already been increased several times this year. It had previously been whittled down several times, amid years of a low interest rate environment.
Cashback on household bills through the 123 accounts is capped at £5 in each of three different cashback tiers.
Customers can earn 1% cashback on council tax bills, mobile and home phone bills, broadband and paid-for TV packages, and Santander monthly mortgage payments.
They can receive 2% cashback on gas and electricity bills, Santander home insurance premiums and Santander life insurance premiums.
They can also receive 3% cashback on water bills.
There is a monthly fee of £4 for the accounts and Santander said this will remain unchanged.
Santander said the interest rate on its 123, Select, and Private current accounts is variable and does not track the Bank of England base rate.
The Bank of England hiked the base rate to 3% last week, marking the latest in a string of increases. Many savings providers have been improving their rates in recent months and some current account providers have also been upping their offers of cash to switch.
On Monday, HSBC UK launched a £200 current account switching offer. Nationwide Building Society is also offering £200 to switch.
Rachel Springall, a finance expert at Moneyfacts.co.uk, said: “As interest rates continue to rise it’s good to see providers enhancing their current account offerings to entice new business.
“A credit interest paying current account can be a convenient way for consumers to earn interest on their in-credit balance and the Santander offer has a high threshold of £20,000 unlike some of its peers.
“Away from current accounts, customers can earn even more interest by using an easy access account, for an account with unlimited withdrawals with just a £1 deposit they can earn 2.52% gross with Tandem Bank, which has a maximum investment of £250,000.
“Those consumers looking at current accounts with benefits may find the cashback offer from Santander enticing, particularly amid a cost-of-living crisis where every penny counts, but it is capped at £5 per month for each category.”