This means that even a “leading” easy-access account offering 2.1% could still result in a -8% “real” loss for savers if high inflation is sustained over many months.
At the same time, higher interest rates could lead to an unexpectedly higher tax bill for some savers if care is not taken. Each tax year, a Basic Rate taxpayer can earn up to £1,000 interest outside of their ISA without paying tax (£500 for someone on the Higher Rate). According to one study, a top easy-access account in December 2021 allowed a Higher Rate taxpayer to hold up to £77,000 in cash before hitting their tax-free limit. In October 2022, however, this limit is closer to £21,250 and could shrink further if interest rates keep going up.
Speak to a financial planner if you are concerned about this affecting you. Other options may be available to help you avoid a needless tax bill, such as using Premium Bonds and/or an ISA.
Interest rates & investments
Interest rates are an important force acting upon different investment markets. For equities (i.e. company shares), a higher base rate can be detrimental to “growth stocks” which take on a lot of debt to grow their businesses. Higher interest rates make it more expensive for companies to take out loans to fuel their ventures (which may not yet be profitable).