Consumers will see the amount of their savings that are protected if a bank goes bust jump by more than two thirds.
The level of deposits covered by the Financial Services Compensation Scheme (FSCS) is rising from £50,000 to £85,000 for single accounts and from £100,000 to £170,000 for joint accounts.
New faster payout rules also come into force today, under which the savings safety net will have a target of paying the majority of claims within seven days and the rest within 20 days.
The FSCS will also have to pay out the total amount of savings that customers have lost, up to the compensation limit. This ends the current practice in which the money people owe from loans held with the same institution can be deducted.
It is the fourth time in just over three years that the compensation limit for savers has been increased. It was first raised from £31,700 to £35,000 in the wake of the crisis at Northern Rock in October 2007, before being increased to £50,000 a year later. It was raised again on June 30, 2009, to the higher level of £50,000 or €50,000.
The latest rise, which increases the compensation limit to the equivalent of €100,000 is being introduced to bring the UK in line with a new European Economic Area compensation level.
But it is not all good news. People who hold accounts with two building societies which have subsequently merged will no longer have separate cover for each society but will now just be covered up to a total of £85,000 for a single account or £170,000 for a joint account.
Despite calls from consumer groups, the compensation limit will also continue to apply to money lost per banking licence and not per individual brand.
As a result, people who want to remain within the limit will have to ensure that they do not have more than £85,000 saved with any one group, meaning they will have to know who owns individual brands.
The FSCS will be launching an advertising publicity campaign in the new year, alerting people to the new higher compensation limit and the importance of holding their savings with a group that is covered by it.
The scheme covers deposits held with UK banks and subsidiaries of foreign banks which operate in the UK but it does not cover money held with UK branches of European banks, which are covered by the relevant compensation scheme in the country where the bank has its head office.
There are also different compensation limits for different products, with investments covered up to £50,000, while people who lose money as a result of an insurer going under can get back up to 90% of a claim they were making under their cover, with no upper limit.