Double blow to 123 account holders as Santander announces rate cut and overdraft fees hike

Tom Wilson
15 August 2016

Santander customers have been hit with a double blow as the bank has announced it will cut the interest rate on its flagship 123 account from 1 November, while it will also hike its overdraft fees in early 2017.

From 1 November, the account will pay 1.5% interest on balances up to £20,000. Currently the account pays 1% interest on balances over £1,000 and up to £2,000, 2% on balances over £2,000 and up to £3,000 and 3% on balances from £3,000 to £20,000.

After the changes, account holders will need an average balance of at least £4,000 before interest to cover the account’s £5 monthly fee.

Santander says the rate cut reflects an expectation that interest rates in the wider market will stay lower for longer.


People with the biggest balances will be hit hardest by the rate cut. Interest on balances between £3,000 and £20,000 will be halved, taking £300 interest from someone with a £20,000 balance.

However, people with average balances of £2,000 or less will actually be better off. Under the current system, a £999 balance would earn no interest, but from 1 November it will earn just under £15 a year, before fees.

The rate cut is the second blow to 123 account holders this year, after Santander hiked monthly fees by 150% from £2 to £5 in January 2016. However, there will be no change to the cashback paid on household bills.

If you’ve got a 123 account you’ll continue to get 1% cashback on council tax, water bills and Santander mortgages, 2% cashback on gas and electricity bills and Santander home insurance policies, and 3% cashback on mobile, broadband and paid for TV packages.

There is also no change to the student, junior or Lite versions of the 123 account.

Overdraft fee hike

From 6 January 2017, the 123 account will charge between £1 and £3 for each day users are overdrawn.

Currently, if you dip into your arranged overdraft it costs £1 per day. From 6 January, arranged overdrafts that are under £2,000 will still cost £1 per day, but if users are overdrawn by between £2,000 and £3,000 it will cost £2 per day, while arranged overdrafts of £3,000 or more will cost £3 per day.

For the heaviest overdraft users, fees could rise by more than £700 a year.

Santander will keep its £12 overdraft buffer so customers won’t be charged if they go slightly overdrawn. Additionally, new customers won’t be charged arranged overdraft fees for the first four months.

Unarranged overdraft fees are unchanged at £6 per day.


Annual credit interest on Santander123 current account – impact of rate change

BalanceSantander 123 current account interest nowSantander 123 current account interest from 1 Nov 2016Difference
£20,000£600£300-£300.00 15.08.2016


Moneywise verdict

This is the second blow to Santander customers this year, after the monthly fee rocketed from £2 to £5 in January.

Yet despite the changes, the account is still one of the better ones out there if you keep a high balance and pay your household bills through it.

Moneywise contributor Faith Archer says: "For me, Santander slashing the rate on its 123 current account means waving goodbye to £300 a year. But much as it pains me to admit it, it will be hard to find better interest and cashback even after the rate cut and fee hike."

If the changes make you want to switch away, do bear in mind that the rate cut is almost three months away, so there’s no need to change just yet.


The following accounts may represent better value, depending on how you use them:

  • Best cashback - Santander 123 Lite. It has the same cashback deal as the 123 account, but lower fees at £1 a month, although it doesn’t pay interest. If your average balance is below £3,200, you’ll save more in fees with this account than you’d have gained in interest with the regular 123 account.
  • Best interest for large balances - Virgin Money Essentials Account. This account pays 1% interest on balances over £1. That might not sound like a great rate, but it’s the only one that comes close to Santander’s incoming rate. This account has no monthly fee, and unusually, it won’t let you go overdrawn. Based on interest alone (so excluding any cashback you may earn), you’ll earn more with this account once fees are taken into account, than you would with Santander from 1 November, if you have under £12,000. 
  • Best interest for smaller balancesNationwide’s Flex Direct Account. This account pays 5% interest on balances up to £2,500, but only for the first year. After that, the rate drops to just 1%.
  • Best accounts for overdraftsFirst Direct 1st Account. This account charges 15.9% AER, with the first £250 interest-free. It costs £1.01 to be overdrawn by £500 for ten days a month, and £9.09 to be overdrawn by £1,000 for 30 days.


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