High interest, easy access: the top paying current accounts

julia kukiewicz
By Julia Kukiewicz

golden piggy bank©iStock.com/skyman8

DESPITE a string of headlines about the rates on high interest current accounts being slashed, some still offer interest at better rates than the top savings accounts: up to 5% AER.

Like most easy access savings accounts they do come with restrictions, mostly in the form of caps on eligible balances, that'll affect how much account holders can actually earn.

And, as with other top current accounts (including those that offer bonuses of £100 and more for switching to them), customers are expected to pay in certain amounts and set up direct debits in order to get their rewards.

But at a time when traditional savings accounts are offering disappointing rates, and now that some of the benefits of squirreling our money in an otherwise lacklustre tax-free account have vanished, we think a look at those terms could really pay off.

Interest paying current accounts:
how much do they earn?

With that in mind, we started off by taking a look at how much some of the UK's top interest paying current accounts will actually earn.

£500

average credit balance

£1,000

average credit balance

£2,000

average credit balance

£5,000

average credit balance
TSB Classic Plus current account
3% AER on balances up to £1,500
(more details)
£15 interest a year
(£1 monthly*)
£30 interest a year
(£2.50 monthly*)
£45 interest a year
(£3.50 monthly*)
£45 interest a year
(£3.50 monthly*)
Halifax Reward current account
£3 monthly credit (£3.75 gross)**, conditions apply
(more details)
£45 'interest' a year
(£3.75 monthly*)
£45 'interest' a year
(£3.75 monthly*)
£45 'interest' a year
(£3.75 monthly*)
£45 'interest' a year
(£3.75 monthly*)
Santander 123 current account
1.5% AER on balances up to £20,000
(more details)
£7.50 interest a year
(<£1 monthly*)
£15 interest a year
(£1.25 monthly*)
£30 interest a year
(£2.50 monthly*)
£75 interest a year
(£6.25 monthly*)
Nationwide FlexDirect current account
5% AER on balances up to £2,500
(more details)
£25 a year
(£2 monthly*)
£50 a year
(£4 monthly*)
£100 a year
(£8 monthly*)
£125 a year
(£10 monthly*)
Club Lloyds current account
2% AER on balances up to £5,000
(more details)
£10 a year
(<£1 monthly*)
£20 a year
(<£1.50 monthly*)
£40 a year
(£3 monthly*)
£100 a year
(£8 monthly*)
Tesco Bank current account
3% AER on balances up to £3,000
(more details)
£15 interest a year
(£1 monthly*)
£30 interest a year
(£2.50 monthly*)
£45 interest a year
(£3.50 monthly*)
£90 interest a year
(£7.50 monthly*)

* These monthly values are approximate.

** We've used the £3.75 figure rather than £3 to reflect the "(gross)" terms used by Halifax at the time of this update. This allows a more accurate comparison with the other accounts.

The calculations above don't take account of any tax we may need to pay (see more on that here), and assume that all the conditions for triggering the interest payments are met (see the last section for more on what those are).

But it's clear to see that earning potential is primarily affected by the average balance in the account and the restrictions on earnings.

Those with a generally low balance in their current account seem to be better off with those eye-catching high interest rates; people who can maintain a high average balance tend to be better off with slightly lower rates that are less likely to be capped.

What does 'average balance' mean?

With a normal savings account, even an easy access one, we'd expect the account balance to stay fairly stable throughout a typical month.

With a current account, however, it's highly likely that as salary or other monthly payments come in and various debits come out, the balance will change quite a lot.

For this reason, these accounts generally calculate interest based on the balance in the account at the end of every day. The "average" balance we've used above is just a guide.

This is particularly important for accounts with tiered rates, or thresholds for earning interest.

Say, for example, an account pays 2% AER on balances above £1,000 and 1% below that amount. Balances hovering around that limit will earn at one rate one day, and the other rate another day, depending on which side of the £1,000 they're hovering at the time.

This could really cut into earnings, despite the £1,000 "average balance" calculation above.

Interest is paid monthly, assuming all the terms of the account are met (see below).

Paying tax on current accounts

Thanks to one major change in the tax rules, many people won't have to worry about being taxed on their current or savings accounts any more.

Since the start of April 2016, basic rate taxpayers (those earning between £11,000 and £43,000) no longer have to pay tax on the first £1,000 of interest earned across their accounts.

Higher rate taxpayers (those earning between £43,001 and £150,000) will be able to earn up to £500 in interest before having to pay tax on it.

Should we earn more in interest than our Personal Savings Allowance (explained in full here), then basic rate earners will need to pay 20% on the extra, and higher rate earners will need to pay 40%.

Assuming that as a basic rate taxpayer we do manage to earn more than £1,000 in interest across our various accounts, the table of top accounts above looks more like this:

£500

average credit balance

£1,000

average credit balance

£2,000

average credit balance

£5,000

average credit balance
TSB Classic Plus current account
3% AER on balances up to £1,500
(more details)
£12 interest a year
(£1 monthly)
£24 interest a year
(£2 monthly)
£36 interest a year
(£3 monthly)
£36 interest a year
(£3 monthly)
Halifax Reward current account
£3 monthly credit (£3.75 gross)**, conditions apply
(more details)
£36 'interest' a year
(£3 monthly)
£36 'interest' a year
(£3 monthly)
£36 'interest' a year
(£3 monthly)
£36 'interest' a year
(£3 monthly)
Santander 123 current account
1.5% AER on balances up to £20,000, conditions apply
(more details)
£6 interest a year
(<£1 monthly)
£12 interest a year
(£1 monthly)
£24 interest a year
(£2 monthly)
£60 interest a year
(£5 monthly)
Nationwide FlexDirect current account
5% AER on balances up to £2,500
(more details)
£20 a year
(£2 monthly)
£40 a year
(£3 monthly)
£80 a year
(£7 monthly)
£100 a year
(£8 monthly)
Club Lloyds current account
2% AER on balances up to £5,000
(more details)
£8 a year
(<£1 monthly)
£16 a year
(£1 monthly)
£32 a year
(£3 monthly)
£80 a year
(£6.50 monthly)
Tesco Bank current account
3% AER on balances up to £3,000
(more details)
£12 interest a year
(£1 monthly)
£24 interest a year
(£2 monthly)
£36 interest a year
(£3 monthly)
£72 interest a year
(£6 monthly)

More accounts, more interest: rules on multiple accounts

As we saw above, caps on balances really restrict earnings, especially on those accounts with 5% rates.

One way around that would be to open a number of accounts - but the banks are a step ahead of anyone thinking of trying that, with restrictions on how many accounts one person can hold at any one time.

In the past these have varied from provider to provider - back when they still offered tiered rates of up to 4%, Lloyds once offered customers the chance to have up to three Club Lloyds accounts, each paying the same rates .

Nationwide still allow customers to open up to four FlexDirect accounts - but unless one of them is held jointly, only one will get the 5% AER rate.

This is the standard: a maximum of two accounts, one of which must be a joint account.

Even so, 5% AER on two Nationwide accounts, each with the maximum £2,500 balance, isn't to be sniffed at.

High interest deals: account by account

We've mentioned all through this article that to receive interest there are requirements to be met.

So let's go through what those requirements are, account by account.

Note that we'll just be focusing on the terms and conditions as they relate to earning interest.

For more application criteria and other information - for example on overdrafts - please click through to the provider.

TSB

The TSB Classic Plus current account (more details) is still one of the more eye-catching accounts, with a 3% AER rate.

Bear in mind, however, that interest is only paid on the first £1,500 in the account, based on the daily balance in the account.

To receive interest
with TSB:
Stay in credit
Register for internet banking
Pay in £500/month

Unlike other accounts offering interest this high, the rate doesn't disappear after an introductory period, so there's no future switching to worry about.

In addition, once a Plus account customer has registered for internet banking (and log on at least once a year to check messages) they need only credit the account with £500 a month - less than most other accounts - and don't have to set up any direct debits.

Halifax

For example, the Halifax Reward current account (more details) requires account holders to pay in at least £750 a month, and pay at least two direct debits out of the account each month.

To receive interest
with Halifax:
Stay in credit
Pay in £750/month
Pay out two direct debits/month

Then they must also stay in credit.

If a customer goes overdrawn, they'll lose that month's £3 reward - and incur a daily fee of at least £1, depending how much over the £50 buffer they go.

Santander

The Santander 123 current account (more details) was once the top earning current account it was possible to get, thanks to a combination of up to 3% interest AER on balances of up to £20,000.

However, since November 2016 they've offered a flat rate of 1.5% on all in-credit balances, which is better for those with lower average balances, but about half as rewarding for those with more than £2,000.

To receive interest
with Santander:
Pay £5 account fee
Pay in £500/month
Pay out two direct debits/month

Santander also pay cash back on direct debits for various household bills, including council tax and gas, electricity and mobile phone bills - so even if the balance isn't high enough to earn interest, the account can still pay.

However there is a monthly account fee of £5 - equivalent to £60 per year - which is worth taking into account.

Nationwide

The downside of the Nationwide FlexDirect current account (more details) is that the 5% is only available for the first year the account is open.

After that, the interest rate drops to 1% AER (variable).

Interest is paid on the first £2,500 of the account balance each month; no interest is paid on any part of the balance over £2,500.

To receive interest
with Nationwide:
Pay in £1,000/month

It also has one of the higher thresholds for sparking interest: account holders must pay in at least £1,000 a month, and funding the account by moving money from another Nationwide account is not permitted.

Lloyds Bank

The Club Lloyds current account (more details)has recently ditched its tiered interest rates in favour of a flat 2% AER payable on balances up to £5,000.

To receive interest
with Lloyds:
Stay in credit
Pay in £1,500/month (or pay £5 monthly fee)
Pay out at least two direct debits a month

The account is free to those who pay in at least £1,500 a month, otherwise there's a monthly fee of £5.

Interest is only paid to customers who pay at least two direct debits a month out of the account; going overdrawn won't affect whether or not interest is earned that month.

Tesco Bank

The Tesco Bank current account (more details) is a fairly new addition to the high interest club, seeming to buck the trend for shrinking returns.

To receive interest
with Tesco:
Open an account
Have a positive balance

It offers account holders 3% AER on balances up to £3,000, with no minimum monthly income or requirement to set up direct debits out of the account.

The benefits don't stop there: customers will be rewarded with Clubcard points for using their debit cards, wherever they spend.

Going overdrawn won't affect whether interest is paid that month, but it will have an impact on the average balance, and therefore on how much interest the account earns that month.