When Saving Gets Sexy

With the base rate heading to 6%, is saving set to become sexy again? We reveal how much interest you could rake in.

With five hikes to the Bank of England's base rate since last August, the base rate is now at its highest level since early April 2001. Of course, while rising interest rates are bad news for borrowers, especially those with large home loans, they bring good news to the UK's savers.

What's more, with the government's preferred annual measure of inflation, the Consumer Prices Index (CPI), still above its target of 2%, pundits are predicting at least one more quarter-point (0.25%) rate hike during 2007. So, savers haven't had it so good -- for the past six years, at least!

In order to demonstrate how rising interest rates make saving increasingly more attractive, I've trawled through thousands of savings accounts in order to see how much interest you could earn on, say, a lump sum of £1,000. Naturally, in order to save time, I had the Fool's independent, unbiased savings search engine do the spadework. Here are the picks of the crop:

Table-topping easy-access savings accounts (excludes notice accounts, fixed-rate and fixed-term accounts, and accounts with withdrawal penalties)

*Account*	Gross rate on £1,000+ (% AER)	*Notes*
ICICI Bank HiSAVE	6.30	Rate with effect from 23/07/07. Rate guaranteed to exceed base rate by at least 0.25% to 31/12/07.
Scarborough BS Click & Save Issue 6	6.30	Rate includes 1% bonus until 30/09/08, then 0.45% bonus until 30/09/09. Rate guaranteed to be 6.30% until 30/09/08, then equal to base rate until 30/09/09, then 0.45% below base rate.
Bradford & Bingley eSavings 4	6.26	Rate includes 0.51% bonus for a year. Rate guaranteed to at least equal base rate until 30/06/09.
Sainsbury's Bank Internet Saver	6.25	Rate with effect from 01/08/07. Rate guaranteed to exceed the average rate paid by over 100 similar accounts until 31/12/10.
Icesave Easy Access	6.20	Rate with effect from 13/07/07. Rate guaranteed to be at least 0.25% above base rate to 01/10/09 and then at least equal to base rate to 01/10/11.

So, on our £1,000, we could earn up to £63 interest in the first year in the above Best Buys. However, most adults are taxpayers, so the majority of us will pay tax on this interest. For basic-rate taxpayers, the deduction is a fifth (20%); for higher-rate taxpayers, the deduction is two-fifths (40%). In other words, our £63 falls to £50.40 or £37.80 respectively.

Rather than lose 20% or 40% of our interest to the taxman, let's become tax dodgers -- legally, of course! By opening a savings account known as a Cash ISA (Individual Savings Account), you can deposit up to £3,000 per tax year and earn tax-free interest on this sum. Let's find the highest interest rates for these tax-free accounts, again on a lump sum of £1,000:

Table-topping easy-access cash ISAs (for new money, not transfers; excludes notice accounts, fixed-rate and fixed-term accounts)

*Account*	Gross rate on £1,000+ (% pa)	*Notes*
ING Direct (UK) Direct Cash ISA	6.55	Rate includes 1.42% bonus for six months and then falls to 5.13%.
National Savings & Investments Direct ISA	6.30	Rate guaranteed to be 0.55% above base rate until 05/04/08.
Kent Reliance BS Direct Mini Cash ISA	6.21	Rate with effect from 01/08/07.

So, with NS&I's cash ISA, you can earn interest of £63 per £1000 and keep every penny, making it an excellent tax-busting account!

Finally, if you're aged 50 or over, then you have access to an exclusive range of top-paying accounts aimed at senior savers. For more information on these accounts, read Great News For Senior Savers. (Please note that rates on several of these accounts have risen since I wrote this article, so check the latest rates before applying.)

Here's to saving becoming chic again!

More: Earn Extra Interest On Your Savings | Are Your Savings ShrinkING?