Trading 212's 4.05% interest on cash explained (there's a catch)

Trading 212 makes a big deal about the fact that it offers 4.05% interest on the uninvested pounds within investing accounts. But how exactly does it work, is it worth it, and what's the catch?

How to earn interest with Trading 212

When you add money to either an Invest or Stocks ISA with Trading 212, your money will stay there until you buy funds or shares. However, it won't earn interest automatically.

To enable this feature, you need to opt in. You'll find this option in the menu under "earn interest on cash". Then, you'll need to agree for part of your money to be invested in qualifying money market funds, known as QMMFs for short.

It's a pretty competitive rate that even beats many of the cash ISAs on the market – and even fixed-term accounts where savings are locked away for years on end.

But where exactly does the interest come from, how safe is your uninvested cash, and is it protected by the Financial Services Compensation Scheme (FSCS)? Let's take a look.

How does Trading 212's interest on uninvested cash work?

When you hold uninvested cash inside your Trading 212 stocks & shares ISA, the platform places that money into the QMMFs we mentioned earlier. These are essentially very short-term loans to banks and financial institutions that earn interest overnight, which Trading 212 then passes back to you as a daily credit to your account.

The rate isn't fixed – it moves in line with prevailing overnight lending rates (such as SONIA in the UK), so when the Bank of England cuts interest rates, the rate you earn will fall too.

What are QMMFs?

QMMFs are tightly regulated funds that typically hold financial assets like government bonds. They're designed to be low-risk while offering slightly higher returns than bank accounts. Trading 212 explains them in their FAQs like this:

They're commonly used as a cash equivalent in pension funds – Trading 212 isn't the only provider to place uninvested cash in QMMFs.

Is my money protected?

Your uninvested money is stored with both banks and QMMFs.

If a bank that Trading 212 used to store money on your behalf went bust, FSCS rules ensure you would be compensated up to £85,000.

However, FSCS protection doesn't apply to QMMFs, and your funds would be treated as investment losses.

This means that – if a QMMF were to suffer financial difficulty – you've got no one to turn to for compensation.

In the worst-case scenario, only the portion of your money that was being stored in bank accounts would be covered.

So, are QMMFs safe?

Trading 212 says it "carefully selects all QMMFs to ensure they are highly liquid, stable in value and maintain their highly regulated status".

And while there are risks associated with these funds, the company says it has safeguards in place to mitigate them.

One primary danger is a QMMF becoming insolvent. But according to Trading 212, it uses high-quality funds and monitors them continuously.

Another scenario could see an investment manager make poor choices that put funds at greater risk. To counter this, the trading platform says it only works with reputable providers.

Despite all of this, unknowns can plunge a QMMF into uncertainty.

Sudden increases in interest rates, for example, can affect the value of the assets that a fund has invested in. Trading 212 navigates this by picking QMMFs that primarily invest in short-term bonds.

And in the event of extreme market conditions meaning that there's a run on QMMFs – resulting in delays to withdrawals – Trading 212 says it makes sure there's an adequate amount of client money in liquid cash so withdrawals can be processed immediately.

Can interest rates change?

It's worth bearing in mind that, as we mentioned, the interest rates on offer can fluctuate.

They're normally set by the banks and QMMFs that Trading 212 has chosen to use, and tend to be adjusted whenever the Bank of England makes changes to its base rate, or whenever Trading 212 chooses.

The risk and your options

QMMFs are commonplace – and according to figures from Trading 212, more than £5.5 trillion were invested in these funds across the US and Europe as of January 2024.

Because they primarily have exposure to government bonds – and countries like the UK and US have an immaculate track record of paying debts – they're deemed to be relatively safe.

But as with most things in life, there is still a small amount of risk.

Here's what the principal and head of Vanguard's taxable money markets, Nafis Smith, had to say about money market funds:

"Since their introduction in 1971, money market funds have broken the buck just two times. The first was in 1994, when a fund was liquidated at 96 cents per share because of large losses in derivatives.3 The second was during the financial crisis of 2008, because of assets held with the then recently bankrupt Lehman Brothers."

There are a few other things worth mentioning at this point.

For one, Trading 212 only places uninvested cash in QMMFs after receiving consent from its customers. To do that, you need to hit the 'Interest on cash' button in the menu at the top of the screen.

You'll then be given a detailed explanation about the main risks associated with QMMFs – as well as a link to some FAQs – before clicking 'Enable'.

A dashboard is also available that sets out how much of your uninvested cash is held in banks and QMMFs:

And these figures presented in monthly statements, too. Again, the share of your money held in banks is protected by the FSCS.

Most importantly of all, the interest-bearing features offered by Trading 212 can be disabled at any time – meaning you're always free to change your mind in the future.

DIY

There are a couple of other catches with regards to Trading 212's cash interest – the first being that you could technically invest into money market funds yourself, in the same way that Trading 212 do.

If this is what you'd prefer to do, we've got a full guide on how to do this – and a comparison of a couple of the funds Trading 212 offers – here.

This cash interest feature is merely simplifying a niche investment task, with Trading 212 taking a small cut of the returns in the process. The exact cut they're taking is not listed on their website at the time of writing, but it doesn't seem to be a significant amount.

Is the interest earned taxable?

If you've enabled cash on uninvested funds in your invest account, you'll have to pay tax on your interest when (or if) you exceed your Personal Allowance.

If you're invested in a stocks & shares ISA, though, you don't need to worry – all growth is tax-free.

Bottom line

Trading 212’s interest on uninvested cash is competitive and easy to access, but only the portion held with banks is covered by the FSCS. The rest sits in QMMFs – typically low risk, but not risk-free and not protected if things go wrong. As ever, check where your cash is being held, weigh up the risks, and remember: in a stocks & shares ISA, your interest remains tax-free.

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