Certificate of Deposit (CD) – What It Is and Why It May Fit Your Savings Plan

If you’re looking for a safe place to park cash and earn more than a regular savings account, a certificate of deposit, or CD, is worth a look. A CD locks your money for a set period – anywhere from one month to five years – and the bank promises a fixed interest rate for that time.

The appeal is simple: you know exactly how much you’ll earn, and most banks offer higher rates than everyday accounts because they can count on your money staying put. In the UK, CDs are often called “fixed‑term deposits” and are offered by high street banks, building societies and online lenders.

How CDs Work in the UK

You open a CD by depositing a lump sum and choosing a term. The bank then pays interest either at the end of the term (a “maturity” payment) or periodically, depending on the product. Early withdrawals usually trigger a penalty – often a few months’ worth of interest – so it’s best to be sure you won’t need the funds early.

Interest rates vary by term length and market conditions. In 2025, many providers are offering between 3% and 5% for 1‑year CDs, while 3‑year terms can push 5%‑6% for larger deposits. Rates are often higher if you lock in a bigger amount, so consider how much you can comfortably set aside.

Tax treatment follows the same rules as other savings interest. In England, Scotland and Wales you get a Personal Savings Allowance – £1,000 for basic‑rate taxpayers and £500 for higher‑rate – meaning you won’t pay tax on CD interest up to those limits. Anything above is taxed at your marginal rate.

Choosing the Right CD for You

Start by setting a clear goal: are you saving for a down‑payment, a future holiday, or just a safety net? Match the CD term to that timeline. If you think you’ll need the money in 12‑18 months, a 1‑year CD makes sense. For longer‑term goals, 3‑year or 5‑year CDs lock in higher rates.

Compare offers from several banks. Look at the advertised APR, the minimum deposit, and the early‑withdrawal penalty. Some online banks waive penalties if you move the money to another CD with them, which can give you flexibility while still earning good rates.

Consider the “laddering” strategy: split your money into multiple CDs with staggered maturities (e.g., 1‑year, 2‑year, 3‑year). When each CD matures, you can reinvest at the current rate or use the cash if a need pops up. This approach balances higher rates with regular access to part of your savings.Don’t forget inflation. A CD that earns 4% looks solid, but if inflation runs at 5% you’re losing purchasing power. Keep an eye on economic news and be ready to shift to higher‑yielding options, such as short‑term government bonds or cash ISAs, if the CD market softens.

Finally, read the fine print. Some CDs have “notice periods” before you can withdraw, which differ from the early‑withdrawal penalty. Knowing these details prevents surprises at maturity.

In short, a certificate of deposit can be a reliable way to boost your savings without taking on risk. Pick a term that matches your plan, compare rates, watch for penalties, and use laddering to keep some cash liquid. With the right CD, you’ll see steadier growth than a typical savings account while keeping your money safe.