The Salary Calculator

Interest rates in the UK

by Madaline Dunn

When it comes to borrowing, be it for a mortgage or a loan, an interest rate will be applied to the amount you borrow. The same goes for any savings you accumulate. That said, it can be tricky to get your head around the ins and outs of interest rates.

According to a study conducted by MoneySuperMarket, 70% of those polled didn’t know what the base rate was. That means there are lots of people out there that could do with a helping hand.

At The Salary Calculator, we’ll give you the rundown of interest rates in the UK and make sure you’re updated with the latest. This article will explain:

• What an interest rate is
• What the base rate is 
• What the current interest rates are
• The different types of interest rates
• Whether or not interest rates will rise
• The pros and cons of the current low rates

What is an interest rate?

An interest rate refers to either the percentage an individual is charged for borrowing money or earned through saving. It is typically expressed as a percentage of the amount you borrow or save over a year.

What is the base rate?

The base rate or bank rate is the most important interest rate in the UK and refers to the rate at which banks and lenders are charged for borrowing. Currently, this rate is 0.1% which influences borrowing and saving interest rates.

Current rates

Interest varies from bank to bank, but often it can cost more to borrow less. According to MoneySavingExpert, the best interest rates for loans of between £3,000 – £4,999 range from 7.3% rep APR and 8.4% rep APR.

For larger amounts, for example, between £15,001 – £20,000, the best interest rates range from between 2.8% rep APR and 2.9% rep APR.

When it comes to savings, easy access accounts with best rates range from between 0.4% AER variable and 0.5% AER variable.

The different types of interest rates

There are a few different types of interest rates, these are:

Fixed Rate of Interest – With this interest rate, the amount you are paid, or the amount you owe, is at a set rate that remains unchanged throughout the term of your account. 

Variable Rate of Interest – Also known as a “floating rate,” with this interest rate, the amount of interest you are paid or the amount of interest you owe can change depending on the base rate.

When exploring loans and savings, you will likely run into two other terms, APR and AER. But what exactly do they mean? 

APR – Annual Percentage Rate: This refers to the total cost of borrowing money in a year (loan or credit card). Included within this are interest and standard fees.

AER – Annual Equivalent Rate: This type of interest applies to saving accounts and is the amount you earn in a year.     

Will interest rates rise?

It is difficult to determine for sure whether interest rates will rise. However, considering the current state of the economy, having shrunk by 19.8% in 2020, interest rates are unlikely to rise any time soon.

The pros and cons of the current low rates

When it comes to low interest rates, there are, of course, advantages and disadvantages. These are as follows:

Pros:

• Lower interest rates make it easier for people to borrow money
• When borrowing is made more accessible, this can drive investment
• Low rates can also make housing more affordable by lowering mortgage payments

On the other hand…

Cons:

• Lower interest rates can detrimentally impact savers because they earn less through interest
• As a result, this can reduce the incentive to save
• Low interest can also lead to people taking on more debt than they can afford 

Tags: interest rates, Loans, Mortgages, savings

Auto-enrolment pensions

by Admin

I’ve been dragging my feet on this one (sorry), but I have finally added an option to the Salary Calculator for auto-enrolment pensions, which employers are obliged to offer to eligible employees if there is not already an employer pension scheme. These pensions involve a percentage being deducted from your pay, but only on what you earn over a certain threshold (£6,032 for the tax year from April 2018). There is also an upper threshold, above which deductions are not taken – £46,350 for the April 2018 tax year.

To use the new option, enter your details in to The Salary Calculator. On the Pension tab, select the “Auto-enrolment” option and enter the percentage of your salary that you will be contributing. Click “Go!” to see the results.

Auto-enrolment pensions also require your employer to contribute to your pension, but I have not yet added this to The Salary Calculator – so enter only the percentage that you will be contributing (your employer’s contribution does not affect your take-home pay).

From 6th April 2018 the minimum amount employees are required to pay into their auto-enrolment pension increases from 1% of their pay to 3% (and from April 2019 it increases further to 5%). This can make quite a difference to your take-home pay – try it out on the Salary Calculator and see what a difference it makes!

Tags: income tax, Pay As You Earn, pension, pension scheme, Pensions, The Salary Calculator

Savings and investment help from Hargreaves Lansdown

by Admin

If you are trying to save for your retirement, or just for a rainy day, it can be difficult to understand what your options are and what is best for you. Should you get an ISA (Individual Savings Account), or a SIPP (Self Invested Personal Pension)? What are the pros and cons of each, and why might you open a savings account instead?

Fortunately, Hargreaves Lansdown have created a series of guides intended to help you make the most of your savings – the guides are free to download, all they ask is that you provide some registration details. If you would like to know more about investing for the future and the tax benefits of doing so, try their introduction to SIPPs, or the beginner’s guide to ISAs.

Also of interest to readers of The Salary Calculator might be the calculators on Hargreaves Lansdown’s site which can help you plan for your retirement.

Tags: calculators, Hargreaves Lansdown, investments, ISAs, pension, personal pension, savings, SIPPs