And there is a new breed of bank: Tesco, M&S and, later this year, Virgin are all trading on their reputations as retailers to charm us into banking with them too. But which account is best?
The best interest rates
Six banks now pay interest on the positive balance in a current account. They all have an upper limit on the amount that attracts interest, but up to that amount all of them pay more on the current account balance than they would pay on a pure savings account.
TSB – the bank that is now separate from its parent Lloyds – pays 5% on the first £2,000 in its Classic Plus account, which would be £100 a year if you managed to keep that much in it all the time.
Lloyds pays 4% on the whole balance if you keep between £4,000 and £5,000 in it – so up to £200 a year from that if you manage it well.
Bank of Scotland, Santander and newcomer Tesco Bank pay up to 3% but all on very different terms.
Tesco Bank current account pays it on the first £3,000. Bank of Scotland Vantage current account, and the Santander 123 account, pay a tiered rate depending on how much is in the account.
Santander pays 3% on the full balance up to £20,000 once you have at least £3,000 in the account. If the balance falls below £3,000 it pays 2% and just 1% if it falls below £2,000. No interest is paid on balances below £1,000.
Nationwide Building Society FlexDirect current account has an opening offer in the first year of 5% on up to £2,500. But after a year the rate drops to 1%.
Tax on interest
All these interest payments are taxable and will have basic rate tax automatically deducted.
Non-taxpayers can register to have the interest paid gross – ask the bank for form R85. Otherwise, get form R40 from HMRC to claim back the overpaid tax.
Higher rate taxpayers will have to pay extra tax through their self-assessment form.
All of these accounts require a minimum monthly payment in and some demand payments out, too.
If you want one as a savings account, make sure you can make the payment in good time to avoid a charge. Tesco, for example, charges £5 for every month in which less than £750 is paid in.
You can usually open more than one current account – though two per bank is the normal limit.
Gifts and cashback
Instead of interest, some of the newcomers give points to be spent in their shops.
Tesco Bank gives one Clubcard point for every £4 spent from the account in Tesco shops and one point for every £8 spent outside Tesco.
M&S current account pays one point per £1 spent in its shops or online store and 100 points are worth £1 – the equivalent of a penny in the pound discount. Points and their value are not taxable.
Halifax Reward current account has a different approach. It pays you £5 a month for just paying in £750 and paying out at least two direct debits every month and staying in credit.
The £5 is after basic rate tax so is the equivalent of £6.25 gross. Halifax pays cashback with certain retailers if you manage the account online or with mobile banking.
Santander has the most generous cashback deal, paying up to 3% cashback when you pay regular household bills by direct debit.
Some banks welcome us with a present. First Direct tops the offers, giving £125 to a new customer. Halifax and Co-op Bank give £100 (plus £25 from Co-op to a charity).
There may be conditions attached to getting the money. M&S gives a £100 gift card to be spent in its shops.
Overdraft fees and charges
The big high-street banks – with the exception of HSBC – now charge a regular fee for anyone whose account is overdrawn, even those who have agreed the overdraft with the bank.
Someone with a regular Barclays account who went £100 overdrawn for 15 days in the month used to pay just 73p in interest charges.
After the change on June 16 that went up by 15 times to a fee of £11.25 for the month. Someone who was £250 overdrawn all month found the cost rose by nearly £20 a month to £23.25.
That is because Barclays charges between 75p and £3 a day for an authorised overdraft once its fee-free buffer of £15 is exceeded.
Unauthorised borrowing above the buffer is charged at £5 a day.
Lloyds and RBS charge £6 every month you are overdrawn above the buffer for even one day and a daily interest charge.
Halifax Reward current account charges nothing for an overdraft up to £50, but above that it is £1-£3 a day if it has been agreed and £5 a day for a ‘by mistake’ overdraft. Santander charges £1 a day with a maximum of £20 a month.
Nationwide charges 50p-£5 a day for unarranged overdrafts, but its FlexAccount comes with a fee-free arranged overdraft for 12 months.
HSBC and the smaller banks tend to stick with the principle that you pay interest only on the amount of your overdraft. If you are overdrawn slightly for a few days each month the charge will be pence not pounds.
All banks charge for bouncing a payment – anything from £8 to £25. And there may be a set-up fee if you go overdrawn without permission.
If your current account is always in credit, go for a good rate of interest and good cashback or rewards when you spend. But if you occasionally have an overdraft, then find the cheapest overdraft deal.
It is now much easier to change your current account. Once you have opened it, the new bank does the rest and it should be working in seven days.
All direct debits and standing orders should be moved automatically. And any payments into the old account will be diverted and the payer informed. Interest on all current accounts accrues daily.
When you close an account you are paid interest till the day you leave.
The switching service applies only if you change a current account.
If you open a second account, it will take longer and payments will not be transferred automatically.
* Offers from banks change frequently. All information correct at time of writing. Check terms and conditions before entering into any commitment.
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