By Anna Bowes – 9th September 2024
It’s finally happened! After months of speculation, the Monetary Policy Committee (MPC) at the Bank of England voted for the base rate to be cut from 5.25% to 5% at the beginning of August.
This cut may leave some savers feeling concerned and worried – especially as there was an initial flurry of rate cuts from many providers. And whilst that is disappointing and the cuts are likely to continue, there’s actually some good news for those with maturing savings and those shopping around for the best rates.
While rates peaked about 12 months ago – paying as much as 6.20% at one point – the current situation still offers a silver lining.
Inflation in August 2023 stood at a substantial 6.7%, so higher than even these top rates.
Although the top interest rates available now are lower than a year ago, so too is inflation. The latest data from the Office for National Statistics shows the Consumer Prices Index (CPI) was 2.2% for the 12 months to July 2024 – which means that on average prices are rising at 2.2% a year, far less than it’s been over the last few years.
So, with the best rates still paying comfortably more that the current level of inflation, this means that your savings can actually grow in real terms—something that wasn’t possible in previous years when inflation outstripped returns. But that doesn’t mean you can be complacent. Unbelievably there are some savings accounts still paying 0.25% or even less!
It’s still important to earn a competitive interest rate and remember to make sure you are being as tax efficient as possible.
The rates on savings accounts may have dipped slightly, but they remain strong and inflation-busting and this is illustrated by the amount of tax that savers are now paying. The most recent forecast from HMRC suggests that we’ll be paying a staggering £10.4 billion in tax on savings interest this financial year—a sharp rise from just £1.4 billion in 2021/22.
This highlights the importance of making full use of your tax-free allowances.
The annual allowances available before you may have to pay tax include;
- Your Personal Allowance
- The Starting Rate for Savings
- Your Personal Savings Allowance
- Your ISA allowance
However, you may or may not be eligible for these allowances, depending on your ‘other income’ – so income other than your savings interest, such as wages, pension or rental income.
Although this has been frozen for some time, the Personal Allowance is £12,570. This is the amount of income you can receive from all sources before you may have to start to pay tax.
If your ‘other income’ is less than £17,570 a year, you should qualify for the Starting Rate for Savings, the maximum of which is £5,000. Every £1 of income you receive above the Personal Allowance of £12,570, will see this Starting Rate reduce by £1.
Finally, once you have used both of these allowances, if applicable, you could use the Personal Savings Allowance (PSA), which is £1,000 for basic rate taxpayers and £500 for higher rate taxpayers. Additional rate taxpayers do not have a PSA.
Finally, UK taxpayers have an ISA allowance which means you can shelter up to £20,000 each year from the taxman. If you use a cash ISA for this allowance, it means that any interest earned will be tax free for as long as it is in the ISA wrapper.
Any of these allowances that you do qualify for are all vital tools in maximising the amount of interest you can take home on your hard-earned interest.
These allowances operate on a “use them or lose them” basis, so it’s crucial to make the most of them each year. Couples should also consider pooling their allowances for maximum efficiency.
When it comes to ISAs, it’s easy to forget about the money sitting in old accounts, but this could be a costly mistake. If you can transfer your old ISAs to a new account with a better rate, it might be worth doing so—especially if you can lock in that rate for a longer term.
Even if there’s a penalty for early withdrawal from an existing ISA, it might pay to take the penalty hit now to secure a more favourable rate and protect yourself against potential future rate cuts – but you need to do the math! What we can say is that with the likelihood of more rate cuts ahead, it’s all about future-proofing your savings and ensuring you’re getting the best possible return in today’s market.
Although this article may contain helpful information and tips, it is not personal advice. You may wish to seek advice from a financial advisor if you are unsure what’s best for your own personal circumstances.