Where to earn most interest on your savings

The annual rate of inflation has risen again, up to 2.9%. This means a basic-rate taxpayer needs to find a savings account paying 3.63% to beat both tax and inflation.

Meanwhile, savings interest rates remain low, thanks mainly to a combination of a low Bank of England base rate and cheap money available to banks and building societies via the Funding for Lending scheme.

Yet there are some ways to get an inflation-beating return on your cash, even after tax.

Let’s have a look at the top rates across a number of areas.


[How to invest for income at a time of low interest rates]

Instant access savings accounts

No instant access account comes close to beating inflation.

Currently the best you can get on your cash is the 1.76% from NS&I via its Income Bonds, however this drops to 1.25% from 12th September. You might prefer the 1.75% on offer from ICICI Bank’s HiSAVE SuperSavings Online Account, which you can open with just £1.

Alternatively, you can earn a rate of 1.65% from the Yorkshire BS Triple Access Saver, which can be opened with £100, though you can only make penalty-free withdrawals three times a year.

Surprisingly, a current account trumps all the top savings accounts at the moment, for smaller balances anyway. Nationwide’s FlexDirect account pays 5% interest on balances up to £2,500 for the first 12 months. The only condition is you need to pay in at least £1,000 a month.



Notice savings accounts

By giving up access to your cash for 180 days you can get a rate of 2.02% from Secure Trust Bank with its Notice Variable Account. You can open the account with £1,000.

If you only want to give up access to your cash for a short time, then Aldermore’s 30-Day Notice account pays a rate of 1.75%, with a minimum deposit of £1,000.



Fixed rate savings accounts

If you can afford to lock your cash up for a year, the best rate on offer is 2.05% from Kent Reliance Building Society. You’ll need £1,000 to open the account.

Over 18 months there’s no improvement on the rate – you can get 2% from Metro Bank with £500, the Islamic Bank of Britain with £1,000 or the Bank of London and the Middle East with £25,000.

With a two-year fixed rate you can get 2.35% from Kent Reliance with a deposit of at least £1,000.

Over a three-year term you can get 2.55% from ICICI Bank and its HiSAVE Fixed rate Account, with a minimum deposit of £1,000.

For longer terms, Shawbrook Bank is paying 2.55% on a four-year bond with a £5,000 minimum deposit, while FirstSave and Shawbrook Bank are paying the top rates on five-year bonds at 2.90%, with minimum deposits of £1,000 and £5,000 respectively.

If you fancy locking your money away for seven years, Skipton Building Society is now paying 3.50% on its Limited Edition Fixed Rate Branch Bond. As the name implies, you can only open an account in a branch. You'll need £500 to open an account.

So let's take a look at how the different savings accounts (plus the Nationwide account) really stack up against one another.

Account

Type

Gross interest rate

Net interest rate for basic rate (20%) taxpayer

Net interest rate for higher rate (40%) taxpayer

Minimum/maximum deposit

Access

Nationwide FlexDirect

Current account

5.00% (one year only)

4.00%

3.00%

£1/£2,500

Unlimited

Skipton BS Limited Edition Fixed Rate Branch BondSeven-year fixed rate bond3.50%2.80%2.10%£500/UnlimitedNone for seven years

First Save Fixed Rate Bond Account

Five-year fixed rate bond

2.90%

2.32%

1.74%

£1,000/£2,000,000

None for five years

ICICI Bank HiSAVE Fixed Rate Account

Three-year fixed rate bond

2.55%

2.04%

1.53%

£1,000/Unlimited

None for three years

Shawbrook Bank four-year fixed rate bond

Four-year fixed rate bond

2.55%

2.04%

1.53%

£1,000

None for four years

Kent Reliance Two-Year Fixed Rate Bond

Two-year fixed rate bond

2.35%

1.88%

1.41%

£1,000/Unlimited

None for two years

Kent Reliance One Year Fixed Rate Bond

One-year fixed rate bond

2.05%

1.64%

1.23%

£1,000/£1 million

None for one year

Secure Trust 180-Day Variable Notice Account

Notice savings account

2.02%

1.62%

1.2%

£1,000/£1 million

None for 180 days

ICICI Bank HiSAVE SuperSavings

Instant access

1.75%

1.40%

1.05%

£1/Unlimited

Unlimited



Cash ISAs

For tax-free savings, if you want instant access then Nationwide and Tesco Bank are among several providers paying 2% on balances above £1. If you want to transfer in ISAs from previous years, then Metro Bank is the best instant access option, also at 2%. However, you'll need to visit a branch to open your ISA.

If you can cope with giving 60 days’ notice to get your cash, then you can get 2.10% from either Nottingham Building Society (branch only, from £10) or Aldermore (minimum deposit of £1,000).

You can get a three-year fixed rate ISA from Coventry BS which pays 2.50%, though you need to invest your full year’s ISA allowance when opening the account.

The best four-year ISA comes from Halifax, paying 2.30% on balances from £500, while over five years Virgin pays 2.75% on balances over £1.

Account

Type

Gross interest rate

Net interest rate for basic rate (20%) taxpayer

Net interest rate for higher rate (40%) taxpayer

Minimum/maximum deposit

Access

Virgin Money Five-Year Fixed Rate ISA

Five-year cash ISA

2.75%

2.75%

2.75%

£1/£5,760

None for five years

Coventry BS Three-Year Fixed Rate ISA

Three-year fixed rate cash ISA

2.50%

2.50%

2.50%

£5,760/£5,760

None for three years

Halifax Four-Year Cash ISA

Four-Year cash ISA

2.30%

2.30%

2.30%

£500/£5,760

None for four years

AldermoreNoitce cash ISA2.10%2.10%2.10%£1,000/£5,760None for 60 days
NationwideInstant access ISA2.00%2.00%2.00%£1/£5,760Unlimited

Tesco Bank Cash ISA

Instant access ISA

2.00%

2.00%

2.00%

£1/£5,760

Unlimited



Greater returns, but riskier options

If you're looking for inflation-beating returns, peer-to-peer websites allow you to lend money to other people or small businesses or even to property investors.

However, your money isn’t protected by the Financial Services Compensation Scheme so there is risk involved.

FundingKnight offers loans to British businesses and says it can offer returns of up to 12%. Note that this is before any bad debts. At the moment, you can invest from £25 and there are no fees for either investing your money. However, you'll be charged a 1% fee for selling all or part of your loans.

Relendex is a new business offering the chance to invest in loans secured on commercial property. It's says you can earn up to 10%. You need at least £5,000 to open an account and you need to contribute at least £1,000 per loan. There's an arrangement fee of around 2% to pay.

If you want to lend to other people who want a loan, RateSetter’s five-year income account offers a fixed rate of 5.20%, and its three-year account pays 4.30%. These rates are inclusive of bad debt and fees.

Account

Type

Gross interest rate

Net interest rate for basic rate (20%) taxpayer

Net interest rate for higher rate (40%) taxpayer

Minimum/maximum deposit

Access

FundingKnight*

Peer-to-peer lending

Up to 12%
Up to 9.6%
Up to 7.2%
£25/UnlimitedUnlimited
Relendex*Peer-to-peer lendingUp to 10%Up to 8%Up to 6%£5,000/UnlimitedLoans can be sold from Q3 this year

RateSetter Income*

Five-year peer-to-peer lending

5.20%

4.16%

3.12%

£20/Unlimited

None for five years








RateSetter Income*

Three-year peer-to-peer lending

3.90%

3.12%

2.34%

£20/Unlimited

None for three years

*Not protected by the Financial Services Compensation Scheme

[Supermarkets beat banks on credit cards and loans]



What to weigh up

Where you put your money will probably be determined by the amount you have to save, your attitude to risk and whether you want instant access to your money.

What's clear though is that if you want a better return on your money in the longer term, with a bit more risk in some cases, you're better off looking beyond traditional savings accounts right now.

Unfortunately, if you just want somewhere to put some money away in case of a rainy day, you're not going to be able to beat inflation unless you go for peer-to-peer savings. If you don't fancy that, you should still shop around for the best rate you can get.

[Compare savings accounts]