Credit unions work a little differently from banks when it comes to savings. Thanks to their democratic ownership, credit unions members come first in all of their services—including interest gained on savings.
At Metro Moneywise we’re always ready to talk to our members or potential new members about how savings rates work from our point of view. Read on to find out.
Do credit union savings interest rates exist? How does it work?
Firstly, it’s unlikely you’ll find a credit union that promotes savings rates specifically, but that doesn’t mean you can’t earn interest on your savings.
Previously credit unions could not pay interest on savings, so they only offered dividends. Today some credit unions do offer interest on savings, but most pay their members an annual dividend too.
Learn more facts about credit unions.
A dividend is a share of the profit generated by a credit union in a period of time, usually a year. It can be thought of as credit union savings account interest. Members of a credit union will receive a dividend at the end of each year. The amount will vary depending on the volume of profits raised on the interest members pay on loans.
Metro Moneywise is a non-profit credit union owned by its members meaning all members get paid a dividend at the end of the year. A dividend is just one of many credit union member benefits, and one advantage over saving with a bank. This is because banks are for-profit organisations, and the profits they make on savings are used to pay shareholders and other funds.
While dividends vary from credit union to credit union and from bank to bank, credit union savings interest rates UK members can expect are usually between 1% and 3%. However, they can also range from 0% to 8%.
The dividend rate (or credit union interest rates savings) represents the about of money you can gain on your own savings as a percentage. So if you saved £1,000, and the credit union’s dividend rate was 3%, you can expect £30 in dividends at the end of the year. The Percentage is the same for each member but might change depending on which credit union you join.
Do you get taxed on dividends?
You will not get taxed on dividends but only up to a certain amount. If the earnings you make from dividends fall within your personal allowance, you won’t be taxed. Personal allowance is the level of income a person makes before having to pay tax. In 2022, the standard tax-free personal allowance is £12,570, but this isn’t the same for everyone. If you earn over £100,000 or claim certain tax allowances, it could be different for you.
This means if your total earnings, including your wage and any other money you make during the year, plus the money you make from your dividends, is below £12,570, you won’t pay any tax. If you earn above £12,570, you will need to pay tax, but only on the amount of money you make over that threshold, not including the £12,570.
You also have a dividend allowance of £2,000 per year. You do not have to pay any tax on the value of dividends under the value of this allowance.
When you do have to pay tax on dividends, you are taxed based on your tax band. The basic rate for dividends is 8.75%.
Here’s more information from the government on how taxing dividends works.
How does the credit union pay interest on savings?
So, do credit unions pay interest on savings? Credit union savings accounts make interest in the same way banks do. When someone takes a loan out, they pay the loan back with interest. This interest goes to the credit union.
This is where the difference is. The credit union collects interest on all loans throughout the year. Some of the profits are used to support the running of the credit union. This includes outgoings like staff wages, office rent, administration fees, and marketing. A credit union will only pay expenses associated with the running of the business, unlike banks that have other expenses.
At the end of the year, all the profits made through interest that don’t go to the organisation’s running costs go back to the members’ savings accounts as dividends. There aren’t any partners or investors to pay back, so all the profits go to the members’ pockets. It’s one of the benefits of credit union banking.
Because the dividend depends on how much money the credit union makes, you won’t know how much to expect until the end of the year. At the end of the year, your dividend is paid directly into your savings account.
This means you don’t get a regular credit union return on savings throughout the year, but a lump sum at the end of the year. The more you save with a credit union, the higher the amount of money you receive in dividends.
Find out how saving with a credit union works, how taking money out of your savings works, and what happens to your savings if you die.
How to Find the Best Credit Union Savings Rates
The average credit union savings interest rates, or the dividend rates, are usually between 1% and 3%, but there’s no standard amount.
Credit unions vary a lot, and each one has certain advantages and disadvantages. You can expect to find different common bonds, services, loan and savings offerings, and member benefits. If you’re looking for the best credit union savings account interest rates, you will need to do some shopping around to find one that matches your needs.
- Where the credit union is based.
- What the credit union’s common bonds are (you will need to have a common bond with the credit union).
- What services it offers.
Most credit unions will be more than happy to have a chat on the phone with you to answer your questions. Call Metro Moneywise on 01706298966.
A credit union with a ‘professional bond’ (a bond with businesses in a certain sector) will partner with employers in a sector. You should be able to check whether your employer is partnered with a credit union. Credit unions with a ‘geographical bond’ will find partners and members in a specific location.
Start by searching for a credit union using the ABCUL credit union search tool. Metro Moneywise has common bonds in the public sector. A list of our partners can be seen on our membership application page.
Our common bonds are in
Compare credit union dividend or interest rates to find a credit union that suits you.