Santander increasing interest rate on flagship 123 current account

Santander UK is increasing the rate on its flagship 123 Current Account, after previously making a series of cuts.

The bank will boost the in-credit interest rate on its 123, Select and Private current accounts by 0.2 percentage points, to 0.5%, on balances up to £20,000.

The new rate will apply from March 28 and means customers will be able to receive up to £100 in interest on their account each year, in addition to any cashback on selected household bills included with the accounts.

The rate increase, which follows some recent Bank of England base rate hikes, means Santander customers can potentially earn around £40 more in interest per year.

In a further bonus which could also be attractive at a time of surging living costs, Santander is also currently offering £140 cashback for people switching to it using the Current Account Switch Service, subject to terms and conditions.

The bank used to pay as much as 3% interest on its 123 deal – making it highly popular with savers.

The 3% rate was halved to 1.5% in November 2016.

The rate was then cut twice in 2020, as interest rates generally tumbled during the coronavirus crisis – from 1.5% to 1% in May and then from 1% to 0.6% in August. Then, last April, the rate was cut to 0.3%.

Santander said last year that the rate cut to 0.3% would still give customers up to around £60 interest on a balance of £20,000 for a full year.

There are no other changes to how the accounts work, Santander said, or the £4 monthly fee, which adds up to £48 per year.

Santander said the interest rate on the accounts is variable and does not track the Bank of England base rate, which has crept up in stages from 0.1% to 0.5% in recent months – increasing by a total of 0.4 percentage points.

Santander customers can earn between 1% and 3% cashback on selected household bills paid by direct debit every month.

Cashback is paid monthly and capped at £5 per month in each of the 1%, 2% and 3% cashback categories.

Rachel Springall, a finance expert at Moneyfacts.co.uk, said: “It’s good to see Santander increasing the rate on its 123 current account to 0.5% as the deal also comes with a great package of incentives including cashback on bills and spending, so it’s attractive for both spenders and savers.

“However, the interest rate was slightly higher a year ago (0.6%) before it dropped to 0.3%.

“At present, for a monthly fee of £4 consumers can earn 1% to 3% cashback on selected household bills and on Santander home or life insurance premiums (up to £15 per month).

“Santander is also offering switchers £140 cash and, as the cost of living rises, consumers may be tempted to grab a free cash perk, but it is imperative they weigh up the overall package of any account before they commit and be sure it suits their needs.”

Highlighting other options which people may want to consider, Ms Springall pointed to the Virgin Money M Plus Account, which she said has a linked market-leading easy access account paying 1% interest.

“Virgin Money’s M Plus Account offers some decent perks alongside the linked M Saver account, but, as with any package, the benefits are pointless unless someone uses them regularly,” she said.