Rates near 4.7% look generous — until inflation and the taxman have their turn. Here is the sum the adverts never show you.
Personal Finance
There is a particular feeling I want to describe, because I suspect you have had it. You move your money to a savings account paying a headline rate that looks genuinely good — 4.5%, perhaps 4.68% if you shopped around — and you feel, briefly, clever. Sorted. A responsible adult who has done the sensible thing, possibly while wearing slippers.
I am not going to take that feeling away from you, because saving is the sensible thing. But I am going to complicate it, gently, because the number on the advert and the number in your life are not the same, and the gap between them is where a great deal of quiet erosion happens.
Where we actually are
Let me give you the real landscape, as of this summer, because it matters.
The Bank of England has held its base rate at 3.75% since last December, after a year in which everyone expected cuts, the war in the Middle East pushed inflation back up, and the cuts stopped coming. The next decision is on 30 July. Meanwhile, the best easy-access rates sit somewhere around 4.5% to 4.7%, and one-year fixed bonds have crept up toward 4.9% — genuinely the strongest savings rates in well over a year.
So far, so cheerful. The headline rate, however, is like a holiday brochure: technically accurate, and quietly omitting the two things that will actually shape your experience.
The two silent deductions
The first is inflation. UK prices rose around 2.8% over the most recent reading and are expected to climb again in the second half of the year as higher energy costs feed through. So your 4.7% is not 4.7%. It never was. The headline is the gross weight; inflation is the packaging you don’t get to eat. It is 4.7% minus whatever inflation quietly removes, and the number that matters — the real return — is the gap between the two. At the moment, that gap is positive, which is good and unusual. For most of the last fifteen years, it was negative, meaning savers lost purchasing power every year while feeling responsible.
The second deduction is tax. Interest earned outside an ISA is taxable once you pass your Personal Savings Allowance (£1,000) for a basic-rate taxpayer. £500 for a higher-rate taxpayer, and nothing at all if you are an additional-rate taxpayer. And here is the part worth circling: from April 2027, tax on savings interest rises by two percentage points across all bands, and the under-65 cash ISA allowance falls from £20,000 to £12,000. The direction of travel is unmistakable, and it is not in your favour. Cash is about to be taxed a little harder, quietly, in the way governments prefer to do the things they would rather you didn’t notice.
Run both deductions together, and that satisfying 4.7% can become something a good deal more modest by the time it reaches you — and, in a higher-inflation year, occasionally something that merely treads water.
The money illusion
Here is the idea I would most like you to carry away, because economists have a lovely name for the mistake almost everyone makes.
It is called money illusion — our deep, stubborn tendency to think in the number on the account rather than in what the number can actually buy. Irving Fisher wrote a whole book about it in 1928. If your balance goes up by 4% and the price of everything goes up by 5%, the number rises, and you get poorer, and the number is what your brain celebrates. We are wired to watch the digits and ignore the groceries, which is marvellous news for anyone in the business of selling you a bigger digit.
Beating money illusion is not complicated, but it is unnatural. It means asking, of any savings rate, one deceptively simple question: after inflation, and after tax, is this actually growing what I can buy — or just the number I can see?
What this does and does not mean
Let me be clear: I am not an adviser, and this is not advice.
None of this is an argument against saving. Everyone needs cash they can reach — an emergency fund, the money for the boiler that will inevitably fail in January, anything you might need within a few years. For that money, a competitive easy-access or fixed rate is exactly right, and using your ISA allowance to shelter it from tax, you still have the full allowance, is worth understanding sooner rather than later.
What it is is an argument against mistaking cash for a growth strategy. Cash is for safety and for the future. Over decades, its job is to lose slowly to inflation while keeping you liquid — which is a perfectly good job, provided you know that is the job. The trouble only begins when someone parks their entire future in cash, watches the reassuring number, and never notices the groceries.
So check your rate, by all means. Then check the two things the advert left out. Knowing exactly what your money is really doing is the whole of the game, and it is why I write about this at all — not to tell you what to buy, but so that no headline number can ever quietly fool you again.
Educational commentary, not financial advice, and I am not a financial adviser. Your circumstances are your own; if a decision matters, take it to someone qualified.
The Jacqueline Brand — knowledge builds confidence, confidence builds wealth. This is editorial commentary for inspiration, not financial or professional advice. Always do your own research. The Collection
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