Paul Lewis: 5 ways to make your savings work harder
From finding better rates to cutting tax, our money expert Paul Lewis explains how to get more from your savings.
Eliot Wyatt
From finding better rates to cutting tax, our money expert Paul Lewis explains how to get more from your savings.
For many Saga readers, savings are an important source of income and if they are earning 4% or more most people feel quite happy with that sort of return for doing nothing. That is what retirement is – structured doing nothingness. But to maximise that return, doing nothing is not an option. Here are my five key things to do.
Savings rates are rising, currently topping 4.5% and perhaps heading towards 5% over the next few months. So you must keep up with these changes.
No one ever made money by leaving their savings in the bank they have been with for 40 years. The biggest high street banks pay interest rates so low they barely make single figures – 1% is typical on an easy access account from the big four banks whose names will be on the tip of your tongue now.
They could afford to pay more – their profits averaged more than £2 billion each in the first three months of 2026. But they choose not to, partly because they can deposit your money with the Bank of England and get Bank Rate on it – 3.75% in May – while paying you barely a quarter of that.
So find a better place to keep your money than your own old bank.
The druid in the Asterix books had a magic potion. His name – in the English translation – was Getafix and his elixir can make your savings healthier. You should get a fix for any savings you will not need soon or for an emergency. Of course, always keep enough in easy access just in case the washing machine breaks, the car goes wrong, or you need a holiday.
Nowadays, even those easy access savings can earn more than 4.25%. But the rest is best in a fixed rate account. They pay a higher rate of interest and that rate is guaranteed – not something you often see in financial products.
Currently the best accounts pay 4.75% or more and that does not change much if the guarantee is for one year or five. If interest rates fall you will be happy you fixed when they were higher. But if they rise you might think why did I fix? Which is why you should limit the pain with a one-year fix.
Cash is lazy. It would be quite happy sitting in a bank earning nothing. You can make it work harder by moving it at least once a year to the best-buy account. I've explained my active cash theory before, but it means putting your money into the best one-year fixed rate account and a year later when it matures, put it into the best then, and repeat each year.
Remember you can now have up to £120,000 in a bank protected by the industry compensation scheme.
For most people the first £1,000 of savings interest is free of tax. It is called the personal savings allowance and if the interest on your savings is less than that no tax is due on it. If you are a higher rate taxpayer, it is halved to £500 a year and if you pay top rate tax – annual income above £125,140 – then it is zero. You can have just over £22,000 earning 4.5% and still be below the £1,000 limit, or half that if you pay higher rate tax.
HMRC will know if you exceed that allowance because banks and building societies report interest earned. Any tax due will be collected by changing your tax code so extra tax is taken from your earnings or pension. If you have neither of those and are not self-employed then you will be sent what is called a Simple Assessment after the end of the tax year and you will need to pay the tax directly.
That £1,000 tax-free allowance is just the start. People with a low income can earn up to £5,000 a year interest on their savings completely free of tax as well. This special ‘savings rate’ of tax is 0% and applies to savings up to £5,000 above the personal allowance of £12,570.
So if your partner has an income below £17,570 any interest they earn that takes their income up to that amount is free of tax. On top of that they get the £1,000 personal savings allowance making up to £6,000 free of income tax. That is equivalent to interest on savings up to £130,000 or more.
Moving savings to the partner with a low income will save income tax for the couple. You must move the money into their own separate savings account, so it becomes their money. That means – and forgive me for raising the issue – you should only do it if you trust your partner not to run off with it!
If you are still at risk of paying tax on your savings interest, the government lets you put up to £20,000 every tax year into an account where the interest is not taxed at all. It is called a cash ISA (Individual Savings Account) and the interest it earns is free of income tax.
So bung as much as you can from your taxable savings accounts into an ISA each year up to the £20,000 maximum. From April 2027 that limit is being cut to £12,000 a year – but only for the under-65s.
The details of who counts as over 65 are awaited but it definitely means that if you were born before 6 April 1962, you will not be affected by the change.
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