The 2% AER/1.98% gross (variable) rate applies to the 1|2|3, Select and Private Current Accounts on balances up to £20,000.

It will be applied automatically and means customers can earn up to £396.38 in interest each year, as well as cashback on household bills for a £4 a month fee.

Based on the in-credit interest rate only, Santander’s increase puts it in third place in the best buy tables. It comes behind Virgin Money’s M Plus Account (2.02% AER) and the Nationwide FlexDirect Account (5% AER), according to Savings Champion data.

However, Virgin Money applies the rate on a balance up to £1,000, while Nationwide applies to balances of up to £1,500, and reverts to 0.25% AER after the first 12 months.

Santander household bill cashback

The cashback on selected household bills applies to those paid by direct debit, and it is capped at £5 in each of the following categories:

Sponsored

How life insurance can benefit your health and wellbeing over the decades

Sponsored by Post Office

1% cashback:

Council tax bills
Mobile and home phone bills, broadband and paid-for TV packages
Santander monthly mortgage payments.

2% cashback:

Gas and electricity bills
Santander Home Insurance premiums (policies administered and underwritten by Aviva Insurance Limited)
Santander Life Insurance premiums (policies administered and underwritten by Aviva Life & Pensions UK Limited).

3% cashback:

Water bills.

£200 bonus to switch to Santander

The interest rate increase comes as Santander launched a £200 current account switch offer last month to customers moving their everyday banking to the high street giant.

New and existing customers switching to the Santander Edge, 1|2|3, Select, Private or Everyday current account can net £200 when meeting the following eligibility criteria within 60 days:

• Switch your account via CASS (Current Account Switch Service which transfers your existing balance, all direct debits, standing orders within seven days)
• Set up and maintain two active direct debits
• Deposit at least £1,000
• Log in to online or mobile banking.

In November, Santander also launched an alternative current account offering with Edge as it took the axe to the 1|2|3 Lite account for new customers.

It also launched Santander Boosts – a ‘personalised’ retail scheme offering cashback, vouchers and discounts to card holders as it closed its previous Retailer Offers scheme.