Savings accounts come in a variety of different forms, but they all aim to build up a lump sum of money that you can use for whatever you like.
You may be saving for a specific purpose or to build up an emergency fund for those annoying times when your washing machine packs up, or just for a rainy day.
Savings accounts usually come in the form of deposit accounts, which pay you interest on the money held in the account. Providers will then use that money to lend to other customers in the form of loans, mortgages and credit cards.
Most people think of savings as putting a little money away regularly to build up a pot of money. However, there are also savings accounts that accept lump sum amounts and aim to increase the value of them.
There are many shapes and sizes of savings plans:
There are no charges to set up deposit savings accounts and usually no fees either. Providers make their money by using your savings to lend to other customers at a higher rate.
You may also be penalised for early withdrawals on a notice account, which saves the provider from paying an amount of interest, thereby increasing their return.
From 6 April 2016, everyone who earns under £150,000 will have a Personal Savings Allowance, which means the first portion of interest earned in a tax year is tax-free. If you're a basic rate taxpayer this amount is £1,000, and if you're a higher rate taxpayer it is £500 (highest rate taxpayers do not get an allowance).
Be careful though, as this doesn't just apply to normal savings accounts. If you earn interest on investments, such as corporate bonds or Government gilts, or if you take an income from any fixed interest investment funds that are classified as 'interest dividends', then they will also count towards your £1,000.
This allowance does not apply to cash ISAs or some National Savings & Investments products, as these are tax-free anyway.
If you earn money over your allowance amount, you'll need to declare your interest to HMRC and pay any tax that is due.
Take a look at our range of savings guides for the pros and cons of each type of savings account.
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Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.
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