Why Islamic banks top fixed rate savings tables - Gareth Shaw
Name and address supplied
Gareth says…
Legacy high street banks simply don’t compete when it comes to savings rates, and you’re right that the best savings rates tables are dominated by providers that don’t have widespread name recognition. Islamic banks are table toppers largely in the fixed-rate savings market, and have been for quite some time.
There are five Shariah-compliant banks licensed in the UK, and it is thought that this country is leading the charge for Islamic finance in the west. There are five banks with UK authorisations – Al Rayan, Bank of London & The Middle East, Gatehouse Bank, Qatar Islamic Bank UK, and Abu Dhabi Islamic Bank.
Advertisement
Hide AdAdvertisement
Hide AdYou don’t have to be a follower of Islam to apply for these top rates - anyone can open an account with an Islamic bank, regardless of your religious beliefs. The only restrictions on opening a Sharia-compliant account are those present for all other savings accounts – meeting minimum funding requirements and providing proof of identity.
All of these banks are regulated by the Financial Conduct Authority, which means that being Shariah-compliant has an impact on the safety of your money. If you save with one of these banks, your money will be protected through the Financial Services Compensation Scheme. This means that if your bank were to go bust, you would be able to claim back up to £85,000 through the scheme.
But what does Shariah-compliant actually mean? It’s not all that different from a standard bank – the savings you deposit with the bank are lent out to businesses that want to borrow. But in line with Islamic principles, you’re not paid interest on your deposit; and your savings aren’t lent to any firms who provide goods and services that contravene these principles, such as alcohol, gambling or tobacco.
This brings us to the ‘expected profit rate’ or EPR. This reflects the return on the investments that the bank has made with your deposits. It is often advertised as a percentage, not to confuse you, but to make it easy to compare with standard savings accounts that pay an annual equivalent rate of interest.
Advertisement
Hide AdAdvertisement
Hide AdThe EPR is not guaranteed – it is more of a target, and can be changed at any time. My team has spent a lot of time analysing these accounts and have not heard of any instances where the EPR has been reduced because the expected target was not met. If it were to happen, the bank should notify you well in advance.
Despite not paying interest, profits from these accounts are treated as savings income by the tax authorities. This means that your returns potentially fall under the personal savings allowance, and you may not have to pay any income tax on them.
Basic-rate and non-taxpayers can earn £1,000 in savings interest before they pay tax. Higher-rate taxpayers (those earning more than £50,000 but less than £150,000) can earn £500 before they pay interest. Additional-rate taxpayers do not qualify for the personal savings allowance at all.
One thing to note on tax – the best Shariah accounts tend to be on offer in the fixed-rate market. Interest becomes taxable in the year it becomes available, which could either be when the fixed-term matures, or annually if you opt for interest to be paid yearly.
Advertisement
Hide AdAdvertisement
Hide AdHowever, some fixed-rate, fixed-term accounts do allow you to access your funds before the end of the term, thus meaning that the interest becomes ‘available’ and potentially liable to tax. Of course this is only an issue if it looks as though you’ll bust through the personal savings allowance because the amount you have saved is so high.
Gareth Shaw is the head of Money at which.co.uk.
---
Support The Yorkshire Post and become a subscriber today.
Your subscription will help us to continue to bring quality news to the people of Yorkshire. In return, you'll see fewer ads on site, get free access to our app and receive exclusive members-only offers.
So, please - if you can - pay for our work. Just £5 per month is the starting point. If you think that which we are trying to achieve is worth more, you can pay us what you think we are worth. By doing so, you will be investing in something that is becoming increasingly rare. Independent journalism that cares less about right and left and more about right and wrong. Journalism you can trust.
Thank you
James Mitchinson
Comment Guidelines
National World encourages reader discussion on our stories. User feedback, insights and back-and-forth exchanges add a rich layer of context to reporting. Please review our Community Guidelines before commenting.