Are you making the most of recent interest rate rises on savings accounts?

If you haven’t checked the interest rate on your savings accounts recently, now might be a good time to do so.

FTAdviser has reported that a third of savers don’t know what the interest rate is on their account. If you’re one of them, you may be missing out on higher rates that could grow your savings more quickly.

Read on to learn why it’s so helpful to understand the interest rate you’re receiving and how shopping around could help you to boost your savings even further.

Interest rates are now at their highest in over a decade

Interest rates on savings accounts have risen over the past two years and are now at their highest level for over a decade. This is because the Bank of England (BoE) has raised the base rate 14 consecutive times, from 0.1% in December 2021 to 5.25% in August 2023.

Source: Bank of England

The BoE has done this in response to rising UK inflation, which rose to 11.1% in October 2022 before beginning to fall.

Increasing the base rate encourages you to save more than spend because you are rewarded with higher rates of interest. When more people are saving than spending, demand for goods falls, bringing inflation back to the 2% target that the BoE is set by the government.

Data suggests this has started to happen, as inflation fell to 4.6% in October 2023.

The BoE has held the base rate steady at 5.25% for the past two meetings, suggesting that the current cycle of interest rate rises may have peaked. The governor of the BoE has stated that they have not ruled out a further rise if needed.

High street banks use the base rate as a gauge when choosing their own savings interest rates

High street banks use the base rate set by the BoE to determine what rate of interest they can offer on their savings accounts and what to charge borrowers. The increase to the base rate in recent years has meant that savers have enjoyed higher rates of interest on their cash.

Not all banks are passing on the interest rate rises to their customers to the same extent, though.

As of 7 December 2023, MoneyWeek reports that the top easy access savings account rate is 5.22%, although you may be able to access rates of up to 7% if you meet the eligibility criteria.

Yet, according to Money Supermarket, some accounts are offering as little as 2% on easy access savings.

This demonstrates how much there is to gain from shopping around for the highest possible interest rates. In fact, the highest savings rates today are slightly outpacing inflation, which is highly unusual for cash.

With inflation falling rapidly and the base rate rises on pause, there’s a chance that these rates could soon fall. So, it may be prudent to review your savings account interest rates sooner rather than later if you’re to benefit from the current offerings.

Higher rates mean you could owe tax on the interest your savings generate

The higher rates currently being offered on savings accounts could mean you are more likely to pay Income Tax on the interest that your savings generate.

Your Personal Savings Allowance (PSA) is the amount that you can earn in interest each tax year before tax is payable. The threshold is based on your marginal rate of Income Tax, as shown below.

If you hold a significant amount of savings in cash, you could find that you’re generating enough interest to push you above the PSA for the year.

The tax that you owe under these circumstances may be collected by HMRC automatically through your tax code if you are employed or if you receive a pension. If you are self-employed, you’ll need to declare the interest you’ve earned on your self-assessment tax return.

You could earn more interest tax-efficiently by saving into an ISA

There are a few different wrappers that could help you reduce the amount of tax that you owe on interest.

Interest that you generate on savings in a Cash ISA, for example, is exempt from Income Tax or Capital Gains Tax, so this could be a helpful way to save if you expect to exceed the PSA threshold.

Remember that you can only save a maximum of £20,000 each tax year into your ISAs.

Get in touch

If you’d like to learn more about how to grow your savings tax-efficiently, we can help.

Email theteam@fortitudefp.co.uk or call us on 01327 354321.

Please note

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.

The Financial Conduct Authority does not regulate tax planning.

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.