LETTER FROM THE FOUNDER: The number your savings need to beat

4.4%. The number your savings need to beat

There’s a number I’d like every saver in this country to know, and almost nobody does. It’s not the rate on your savings account. It’s the rate you need just to stand still.

Most of us judge our savings by one thing: is the balance going up? If it is, we feel fine. But a balance going up doesn’t mean your money is growing. Prices are rising too, and if you pay tax on your interest, part of every pound of interest goes to HMRC before you can spend it.

So I sat down and worked out the break-even rate: the interest you need to earn just to keep up with inflation, after tax.

The numbers

Inflation is currently 3.5%. If all your interest is covered by your tax-free allowances, that’s your break-even rate. Earn less than 3.5%, and your money buys less each year, even though the balance goes up.

But if you’ve used up your Personal Savings Allowance, and your savings aren’t in an ISA, the number climbs:

• Basic-rate taxpayers need around 4.4% to break even, because they keep 80p of every pound of interest.
• Higher-rate taxpayers need nearly 5.8%, because they keep just 60p.
• Additional-rate taxpayers need around 6.4%.

From April 2027, when tax on savings interest rises to 24%, 44% and 49%, those numbers go up again, to roughly 4.6%, 6.25% and 6.9%. And that’s assuming inflation stays at 3.5%. The Bank of England expects it to reach 4.9% by next spring.

This isn’t just a problem for the wealthy

For years, tax on savings was something only people with very large sums had to think about. Not any more. HMRC figures show around 4.5 million people are expected to owe tax on their savings interest this tax year. The number of higher-rate taxpayers paying it has almost quadrupled in four years, from around 405,000 to 1.52 million.

The reason is simple. The Personal Savings Allowance, £1,000 for basic-rate taxpayers and £500 for higher-rate, hasn’t changed since it was introduced in 2016. In my view, it was designed for a world of near-zero interest rates. At 4%, a higher-rate taxpayer uses up their entire allowance with just £12,500 saved.

What I’d do

First, find out what your savings are actually paying. Not what you think they’re paying: log in and check. Many easy-access accounts on the high street pay well below 3.5%.

Second, use your ISA allowance. Inside an ISA, your break-even rate is simply the rate of inflation, whatever tax band you’re in. This week’s Rate of the Week pays 5.03% fixed for a year, which beats inflation comfortably and leaves you with a real return.

Third, if your money doesn’t need to be in cash, ask whether it should be. Cash is essential for emergencies and short-term plans. But over the long term, it struggles to keep up with rising prices. You are much more likely to successfully beat inflation if you invest money you won’t need for 5 years. 

My opinion

We’re told to save, and rightly so. But the system makes it surprisingly hard for ordinary savers to stand still. Interest rates rise, so the balance looks healthier. Then frozen allowances and higher tax rates take back a bigger share. The people who lose out most aren’t those gambling with their money. They’re the careful ones, who did exactly what they were told and kept it somewhere safe.

This letter is for educational purposes only and is not financial or tax advice. Break-even rates are illustrative and assume inflation of 3.5% and that all interest is taxable. To check how much tax you could pay on your savings, try our Personal Savings Allowance Calculator.

Sources

• HMRC warning as 4.5 million Britons to be hit by savings tax, GB News (HMRC FOI data analysed by Spring)
• Savings and property income tax rate increases, Deloitte
• UK inflation: what is the current rate, Be Clever With Your Cash
• Break-even rates are Investing Insiders calculations: inflation divided by the share of interest you keep after tax.