Due to the record low interest rates offered in the majority of savings accounts, more and more people are forced to consider locking up their savings for longer periods of time to receive higher interest.
Fixed rate bonds offer higher interest rates in exchange for tying up savings for a longer period of time. Typically, the term of a fixed rate bond can vary from 1 year, 2 years, 3 years or 5 years. As a general rule, longer fixed rate bonds offer the highest interest.
Personal Savings Allowance
A concern for many, looking to receive a significant amount of interest on their savings, is the amount of tax they may have to pay on the interest they receive.
In April 2016 a new Personal Savings Allowance was introduced, which meant that basic rate tax payers receive their first £1,000 on their savings tax free and high rate taxpayers can receive their first £500 of interest tax free.
Therefore, if you are unlikely to earn more than £1,000 in interest, you will be able to explore the many fixed rate bonds on the market and not have to worry about paying tax on your interest.
Cash ISAs
If your savings will earn more than £1,000 in interest over the course of a year, it may be prudent to consider putting your savings into a cash ISA.
Cash ISAs allow you to earn tax-free interest up to a certain yearly limit. The current tax year limit is £20,000. This may be an attractive prospect if you have a large amount of savings and are likely to earn a significant amount of interest on your savings.
It should be noted that cash ISAs do not always have the highest interest rate, however the prospect of tax-free interest may make up for the lower rate.
