What is a Net Rate?

What does a net rate mean?

Net rate is the rate of interest that you receive on a savings account after tax (specifically after the basic rate tax of 20%, or the VAT) has already been deducted.

You may notice a net rate of interest shown by some banks and building societies on websites or literature. However, as interest is now paid without the deduction of tax, net rates may not be so well broadcasted (however, they are still important if you earn more interest than what your Personal Savings Allowance allows).

As with the gross rate, the net rate shows you what you would receive at the beginning of taking out the savings account. Compound interest (where you receive interest on your original investment and any accumulated interest thereafter) is not taken into account, and nor does it give an annual rate like an AER does, if the savings account that you are looking at has an introductory bonus of less than a year.

A net rate usually only reveals the rate of interest that you would receive at the outset if you are a basic rate taxpayer, so if you pay a higher rate or an additional rate tax, it can be a misleading comparison. Remember that if you are a basic rate taxpayer, the personal savings allowance means that you can earn £1,000 in savings interest per tax year before tax is deducted (if you are a higher rate taxpayer the amount is £500, and if you are an additional rate taxpayer, you do not get a savings allowance at all).

In order to determine what your personal net rate of interest is, you would need to deduct your tax rate (higher rate at 40%, additional rate%, 45%, the basic rate at 20%) from the gross rate.

For example, if the gross rate that is offered by a savings account is 3.00% and you are a taxpayer with a higher rate, you would do the following calculation:

3 – 40% = 1.80%

Making use of your own “net rate” is also an excellent way to compare the gross rate on a cash ISA against a non-ISA savings account.

The Basics of Peer to Peer Savings

Peer to peer savings is also known as P2P. Peer to peer lending or crowdfunding is a way to look for high rates of interest as a return for lending your savings to others. Here is a guide on what you need to know before you invest in peer to peer savings.

What is peer to peer savings?

Peer to peer savings is a loan based platform which converts your savings into a lending stream for possible borrowers.

This means that you can lend your money to others for a fixed return, in the similar way that a bank or building society offers loans.

This is how a peer to peer savings works:

  1. Add your savings to your selected P2P providers’ platform
  2. Lend your money to a borrower via the P2P provider
  3. The borrower repays your money back with interest over a fixed term – earning you a profit

You can decide on how long to lend your money for, with terms that are as long as 6 years or as short as 31 days.

However, be careful on how long you tie your money up for, as there are penalties that may be charged for withdrawing your funds early.

How much can you save?

There is no maximum amount to how much you can save so you can save as much as you like.

However, there is a minimum limit on the amount that you have to lend; usually around £10 or £25.

As P2P savings acts like a loan, there is a risk that you may not get your money back if the borrower cannot keep up with their repayments which is known as defaulting.

For this reason, you should always spread the risk by lending your savings to various borrowers.

Higher investments, such as £50,000, can become longer to distribute to borrowers which implies that you will need to wait longer in order to receive a return on all of your money.

Who can you lend your money to?

This depends on the provider that you select. The typical types of borrowers include:

  • An individual: this is somebody that is looking to borrow money, who may not have been able to receive credit through traditional methods, for example, through a bank
  • A start-up business: Every new enterprise which requires funds for development or  expansion in their business

Depending on the need for funds, you may have to wait for a few days or  a few weeks until you can lend your money out.

P2P providers will store your money in a holding bank until you can lend it out, with some providers offering a small amount of interest during this time.

Can anyone borrow your money?

No. Borrowers must pass a range of checks to qualify for P2P lending.

These checks are completed by the P2P provider, and these include:

  • A full credit check
  • An identity check
  • An affordability assessment

If the P2P provider you selected is registered with CIFAS, they will also execute an anti-fraud background check on each borrower. They will not perform this check if the provider is not registered with CIFAS.

Which borrower should you decide to lend to?

Individuals are characterised based on their credit history which also has an effect on the amount of interest that you can get in return for your money, broadly speaking:

Borrowers credit history Risk to your moneyYour interest rate
ExcellentLowLow
PoorHighHigh

Start-up businesses are not classified by their credit profiles so you will have to research the company before you decide to lend to them.

Does it cost you anything?

Yes, most providers will require an annual servicing fee of about 1 percent. This is deducted from each repayment before it gets to you.

If you decide to withdraw your savings during a fixed term, you will be charged with a sale fee; this is normally around 0.25 percent. The sale fee includes the costs of looking for a new investor to put in the amount that you take out of the fixed term loan.

If you decide to withdraw your money at the end of an agreed term, you will not be charged.

Do you pay tax on P2P savings?

You pay for tax on P2P savings. However, your provider will not automatically subtract any tax from your interest, unlike building societies or banks.

You will have to declare any P2P savings interest that you earn by accomplishing a self-assessment form at the the tax year’s end.

Can you make use of your ISA allowance with P2P savings?

Yes, if you have an innovative finance ISA, you can save into a peer to peer investment with the use of your tax-free ISA allowance.

This means that the interest that you earn will be tax-free and that you will not be required to accomplish a self-assessment form for any ISA money you have used in P2P savings.

When will you get your interest?

You will get your interest usually at the end of the lending term that you have chosen. However, this depends on whether you lent your money on a rolling term basis or a fixed term:

  • Rolling term: A portion of your capital and interest, every month for a set term will be paid to you. This means that you can re-invest or withdraw your monthly capital repayments after each month if you want to.
  • Fixed term: You can lend your savings for a fixed period, for example, one year, and you get your capital back at the end. You can also decide to have any interest given to you on a monthly basis.

Where to invest in peer to peer savings?

It is only an online savings platform, and every provider has its own methods of operating.

You should analyse all of the P2P savings and investment providers to look for the one which will offer you the best return on your savings.

To start saving, you must register on the website of your chosen provider, add your savings, then from a list of borrowers, select who to lend your money to.

Will your peer to peer savings be protected?

There is usually no protection under the FSCS, which means that you would possibly lose your money if you save via a provider who fails.

Some P2P providers have their own schemes which will cover your savings if a borrower default on their payments.

These schemes include a definite amount of money to cover any default payments. If a huge amount of borrowers default at the same time, the scheme may not have adequate money to cover the entire loss to each investor, meaning that you could lose your money.

Make sure that you check the details of any scheme proposed by a provider before investing your money.

Is peer to peer savings regulated?

Yes. Since April 2014, peer to peer providers are regulated by the FCA, which means that every provider has to comply with the terms that are listed below:

  • Your money must be protected by providers that are meeting certain capital requirements
  • Be clear and transparent regarding the risk and who are to borrow your funds
  •  If their platform collapses, providers must have plans in place in order to collect your money

You can check if a peer to peer company is regulated by looking for their name on the FCA register. However, being regulated does not mean that they are covered by the FSCS.

Can You Still Receive a Decent Return on Your Savings?

It is harder than ever to earn money from your savings. However, you could get a better return if you extend your search for interest. Here are some of your options.

Where to begin

If you have savings, discover what interest rate you are receiving by contacting your bank or building society. Chances are, you could receive more.

Even the smallest increase in your interest rate can make a difference, especially if you already have a great amount of money saved up.

If you are just beginning to save, you should still scout around for the best rates possible.

Inflation-proof your savings

After tax, the rate of your savings must be greater than the rate of inflation, also known as the Consumer Prices Index (CPI), for your money to actually be earning.

The CPI is calculated by averaging the cost of consumer goods and services.

If the CPI rises, there will also be an increase in the price of consumer goods and services, so if your savings interest rate is lower, your money will depreciate in value.

What to look for

There are a lot of different kinds of savings accounts, and picking the right one can help you raise the interest you earn.

  • Instant access accounts: These normally pay the lowest interest rate, like 0.1 percent. However, you can withdraw and deposit money whenever you want. If you require to make a decent return, try to avoid these accounts.
  • Notice accounts: These accounts can offer a slightly higher interest rate than that of the instant access accounts. However,  you will be required to give a notice to perform a withdrawal, like 60 days, or face an interest charge.
  • Regular savings: These accounts can offer the largest interest rate out of any savings account, but there is typically a restriction on how much you can pay in every month. Some even limit you from withdrawing in the first 12 months.
  • Fixed term accounts and bonds: These accounts tie your money up for a fixed term, like one year. They do not offer rates that are much greater than notice accounts and limit the access to your money even more.
  • Cash ISAs: These accounts are tax-free versions of the savings accounts. However, you could earn up to £1,000 in interest before tax from any savings accounts every year, which makes these accounts less competitive.
  • High-interest current accounts: These accounts can offer larger interest rates than the savings accounts. However, they typically set a limit on how much you can earn interest on, for example, £2,500.

See also: Which Type of Bank Account Is Right For You?

Although interest rates are currently low, think about the access you want for your money. Usually, the more limiting the account is, the more you could receive in interest.

Try something that is new

There are a lot of ways that you can invest your savings, even if you do not want to tie your money up for five or six years.

All investments offer you the potential to receive more than a savings account. However, they also place your money at risk.

Here are some options and where to find more details

Peer to peer

  • Crowdfunding: You typically receive a high interest rate, and your money is loaned out to businesses and people and repaid over the term you choose.
  • Innovative Finance ISA (IFISA): This similar to crowdfunding. However, you can use your ISA allowance to make any interest you earn free from tax.

Trading

You can make use of a trading platform to perform the following types of trades:

  • Financial spread betting: You can bet on the value on a market price that is increasing or decreasing.
  • Contract for difference (CFD): You trade contracts across numerous markets.
  • Forex: You bet on the value of one currency rising or declining against another.
  • Share dealing: You trade shares in listed companies.
  • Binary options: You bet on a market price going up or down in a set time frame.

Portfolio investments

You could ask for help from a financial adviser to assist you in building a collection of investments in one portfolio. There are several kinds of collective investments:

  • Unit trusts
  • OEICs
  • Investment trusts

You may have to pay for an adviser to assist you in creating or managing these types of investment.