Why having a regular savings habit is important
Never underestimate how a regular savings habit will grow your money over time. Make saving one of your top priorities by allocating a fixed amount of your income to savings each month. Ideally, set up a monthly automated deposit into your savings account, timed to leave your account just after payday. While saving may be the last thing on your mind due to the financial pressures of the current cost of living crisis, even a small, consistent contribution to a savings account will grow over time.
Emergency fund
You should aim to save and maintain at least three times your monthly expenses in an emergency fund. Over time, aim to build your emergency fund to cover six months of expenses. This fund serves as your safety net, helping you cover any unexpected expenses without going into debt.
Shop around for the best interest rates
Shop around for the best interest rates on savings accounts to maximise the return on your money. Your piggy bank is for small change only, as, unlike a good savings account, it doesn’t pay interest. Take the time to learn about the magic of compounding interest and how it helps your money grow over time.
Savings accounts
Several types of savings accounts are available, such as instant access savings accounts, which, as the name suggests, allow you to access your savings at any time. If you have savings you are unlikely to need for a while, consider a fixed-term savings account or a notice savings account, as these typically pay higher interest rates. They do however restrict access to your money, as they lock up your savings up for a fixed period. Some savings providers offer loyalty regular savings accounts, where you save a fixed amount every month, usually for a year. These accounts encourage regular saving and, in return, offer above-market interest rates. Always compare the interest rates on offer across various savings accounts and financial institutions, as they can vary considerably.
ISAs – Individual savings accounts
Individual savings accounts (ISAs ) let UK individuals save up to £20,000 a year tax-free, in cash ISAs or stocks and shares ISAs. With individual savings accounts you can earn interest, dividend income and capital gains on investments tax-free. There are several types of ISAs available, including junior ISAs (JISAs) and Lifetime ISAs (LISAs). With a LISA, you can save for a house or retirement, with the government adding a bonus of 25% to any contributions you make, up to an annual contribution limit of £4,000. For more information about ISAs, follow the link:
Changes to ISAs from April 2027
From April 2027 the annual limit for cash contributions to cash ISAs is decreasing from £20,000 to £12,000 for people under 65 years. This change is to encourage people to invest more of their money in the stock market. From April 2027, you can save up to £12,000 of cash in an ISA with the remaining £8,000 allowance allocated to stock market investments. This change is designed to encourage more people to invest and to stimulate the economy through long-term investment. Investing provides higher returns on your money when compared with interest earnings from savings accounts.
Types of savings accounts
| Savings Accounts |
|---|
| Instant access savings: Allows deposits and withdrawals at any time. |
| Fixed-term deposit: Money is deposited for a specified period and no withdrawals are permitted during the fixed period. The cash and interest are returned to you at the end of the fixed period. |
| Notice savings account: These accounts require you to give notice to the savings provider when you want withdrawal money. For example, with a 35-day notice account, you will need to give 35 days’ notice before you can access the funds. |
| Loyalty regular savings: These accounts are usually only available to existing customers of a financial institution. They pay a higher interest rate than a typical savings account. Loyalty accounts often have a one-year fixed period and you must contribute a fixed monthly amount up to a specified limit. You can access the money at the end of the fixed period. |
Personal savings allowance
As a basic rate taxpayer (earning up to £50,270), you have an annual personal savings allowance (PSA) of £1,000. This means you can earn annual interest up to £1,000 tax-free. Any interest over £1,000 is taxable at 20% (22% from April 2027). If you are a higher-rate taxpayer, the personal savings allowance is £500.
The Financial Services Compensation Scheme guarantees savings deposits up to £120,000 with each savings provider.
Starting savings rate allowance
UK individuals who earn below the tax-free personal allowance of £12,570 can earn £5,000 in interest annually tax-free. This is the starting savings rate allowance. However, for every £1 you earn over the personal allowance of £12,570, you lose £1 of the £5,000 starting savings rate allowance. For example, if you earn £15,000, your starting rate savings allowance will be reduced to £2,570. This allowance is beneficial for retired people with a low income who earn a reasonable amount of interest on their savings.
Stock market
If you have spare savings, consider investing in the stock market by investing in funds or individual company shares. Investing in the stock market is risky as share prices can go up or down. Investing is a long-term savings alternative for money you don’t need and won’t need to access in a hurry. When you sell stock market shares and investments, you want to sell when the stock value is high. If you suddenly need to access cash from your investments, you may have to sell the investment at a lower share price and lose money.
If you invest in the stock market, make sure you invest using a stocks and shares ISA (individual savings account), which lets you invest up to £20,000 a year tax-free. This means any dividend income and capital appreciation on your investments is tax-free, saving basic rate taxpayers 8.75% in dividend tax (10.75% from April 2026) and capital gains tax.
Want to learn more about investing in the stock market?
What will the value of my money be in the years to come?
Seeing how a regular savings habit grows your money over time provides a great incentive to save. We can estimate the future value of a monthly savings contribution using time value of money formulas. Click on the link below to access our future value calculator and enter the interest rate, time and monthly contribution to estimate the future value of your savings.
