What are the different types of bank accounts and how can they impact your savings?

Bank accounts are essential for managing your money in the modern world. But the type of bank accounts you open can change how you protect and grow your wealth. Depending on how much access you need to your funds, you can structure your savings to increase your earnings above inflation.

In this guide, we explain how each bank account type works and what you can expect from your savings.

What are the six types of bank accounts?

There are six different types of bank accounts in the UK:

1. Current accounts

Current accounts are used for everyday spending. They offer unlimited deposits and withdrawals and are often used to pay bills and direct debits.

Current accounts usually offer a lower interest rate on your cash.

2. Savings accounts

Savings accounts grow your cash with attractive interest rates. They are designed to hold money for longer than current accounts and may limit how you can access your savings.

Different types of savings accounts may lock your cash for a fixed term, or restrict how frequently you can withdraw money, offering higher interest rates in return.

3. ISAs

ISAs (Individual Savings Accounts) are tax-free savings accounts that offer an annual £20,000 allowance. This can be spread across multiple bank accounts but cannot exceed this deposit limit.

There are different types of ISAs available, but two of the most popular options are Cash ISAs and Lifetime ISAs.

Cash ISAs

Cash ISAs are a tax-free way to earn interest on your cash. You can save up to £20,000 per year in a cash ISA without being taxed on your interest.

This means higher-rate taxpayers can earn additional tax-free interest on their wealth, beyond the £500 allowed through their Personal Savings Allowance (PSA).

Lifetime ISAs

Lifetime ISAs (LISAs) also offer tax-free interest on savings and a government bonus on deposits. But you can only use your bonus in two specific circumstances. These include:

• buying your first home
• funding your retirement

If you withdraw your LISA funds for any other reason, the government will charge you a penalty fee. The penalty could mean you lose some of the money you put into your account.

LISAs have a deposit limit of £4,000 a year for savers between the ages of 18 to 50 – with the government awarding an annual 25% bonus on deposits. This means you could earn a maximum £33,000 tax-free bonus when you reach 60 if you max out your allowance every year – not including compound interest

You can learn more about the different types of ISAs and whether they can help you reach your savings goals in our detailed guide.

4. Fixed deposits

Fixed deposits – also known as fixed-rate bonds or fixed-rate savings – lock your cash for a set term at a guaranteed interest rate. Terms generally last one to five years.

These accounts offer higher interest rates, making them an effective way to grow your wealth for a specific expense.

5. Trust accounts

Trust accounts are managed by a ‘trustee’ on behalf of beneficiaries – often children or other family members. 

They can give you extensive control to transfer savings or estates to loved ones.

6. Ethical bank accounts

Ethical banks consider what means the most to the account holder, alongside financial security.

For example, Sharia bank accounts don’t earn interest. Instead, the bank shares profits with the owner of the account. Cash held in these accounts also won’t be used to fund anything forbidden under Sharia law, such as alcohol, tobacco, or adult entertainment.

Types of savings accounts

Savings accounts help you grow what’s in your bank. Different accounts offer benefits depending on how you like to manage your money.

Below, we look at some of the different types of savings accounts and how they work:

Instant access savings

Instant access savings accounts let you withdraw money whenever you need it but often have lower interest rates as a consequence.

Like current accounts, they’re useful for accessing cash instantly for everyday spending.

Limited access savings accounts

Limited access savings accounts give you a certain number of withdrawals each year.

They balance the benefits of higher interest rates, compared with instant access savings, with quicker access than a notice account.

Notice accounts

Notice accounts require a warning before withdrawing your funds. This is often anywhere from 30 to 180 days.

In return, they offer higher interest rates than instant access accounts – making them effective for growing wealth long term.

How do bank account savings work?

Bank accounts let you deposit money and earn interest on your cash. Interest often compounds, meaning that it scales up as your account balance grows over time.

Below is an example of how much compounding interest you would earn on £10,000 in a bank account offering 5% interest over five years:

If you exceed your Personal Savings Allowance and yearly cash ISA deposit limit, you may be taxed on the interest you earn.

This is where understanding the difference between gross interest and the Annual Equivalent Rate (AER) can be helpful.

Gross interest refers to pre-tax earnings, while AER explains what you’ll likely earn after tax. Calculating your AER helps you understand your wealth and plan for bigger purchases

How many savings accounts can you have?

There is no limit on the number of savings accounts you can open in the UK. But there are limits on how much tax-free interest you can earn each year.

Establishing a portfolio of cash options can be beneficial, letting you balance high earnings with easy access. But it’s important to understand the different types of accounts available to achieve this.

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