UK savings · September 2026
How inflation affects your savings rate: nominal vs real returns explained
FSCS protects eligible deposits up to £120,000 per person, per authorised institution.
Last updated: 11 October 2026.
Key points
Key decision routes
For where to compare easy-access nominal rates: easy-access savings. For locking a rate versus keeping access: notice vs fixed-rate savings. For deposit protection if a firm fails: FSCS protection limits.
The three ideas (plain English)
| Term | Meaning |
|---|---|
| AER | Annual Equivalent Rate — standardised way to show interest including compounding. Still a nominal (headline) rate |
| Nominal return | How many pounds appear in the account |
| Inflation (CPI) | Average price rise for a basket of goods and services |
| Real return (simple idea) | Roughly nominal rate − inflation (then adjust for tax). Whether those pounds buy more or less than before |
| Purchasing power | What the balance can buy — the thing many savers care about for “keeping up” |
Calm caveats: CPI is an average — your personal inflation can differ. Easy-access AERs are often variable; a fixed deal locks the nominal rate, not inflation. Past inflation ≠ future inflation.
Worked example — illustration only
Illustration only — not a forecast or a product rate. Round numbers only.
Not a quote from any bank. Not advice.
| Step | Assumption / calculation | Result |
|---|---|---|
| Assumptions | Balance £10,000; advertised AER 4.0% (variable), interest paid annually for simplicity; CPI stand-in 2.9% (ONS July 2026); ignore compounding quirks and fees | — |
| 1 — Nominal interest | £10,000 × 4.0% | £400 interest → balance £10,400 |
| 2 — Rough real check (before tax) | 4.0% − 2.9% | About +1.1% real → purchasing power up a little in this illustration |
| 3 — If inflation exceeds the rate | Same £10,000 at 2.5% AER with 2.9% CPI | Rough real −0.4%. Balance rises to £10,250, but a typical basket that cost £10,000 may cost about £10,290 — fewer goods for the money, even though the statement shows growth |
| Optional tax twist | Same 4% AER for a higher-rate taxpayer who has already used their £500 PSA; taxable slice taxed at 40% | After-tax nominal falls, so real rate falls further. Not tax advice — check GOV.UK for your position |
A “decent” AER can still lose purchasing power after tax. That maths does not mean “never hold cash” — cash still has a role for an emergency fund and near-term spending.
Purchasing power is what that balance can buy — the thing many savers care about when they ask “am I keeping up?”
Calm caveats
- CPI is an average. Your own costs (rent, energy, food) can rise faster or slower.
- Easy-access AERs are often variable. A fixed deal locks the nominal rate, not inflation.
- Past inflation is not a forecast of future inflation.
- This page does not forecast Bank Rate or CPI.
Context as of 11 October 2026
Every figure is dated. Figures published after 11 October 2026 (September CPI, the 5 November Bank Rate decision) are not included.
| Measure | Latest published | Source / note |
|---|---|---|
| CPI (12-month) | 3.1% to August 2026 (was 2.9% in July) | ONS bulletin 16 September 2026 |
| CPIH (12-month) | 3.3% to August 2026 | ONS (includes owner-occupier housing costs) |
| September 2026 CPI | Not published yet | ONS release due 21 October 2026 |
| Bank Rate | 3.75% | Bank of England; MPC held in September 2026; next decision due 5 November 2026 |
| Inflation target | 2% CPI | Bank of England |
Bank Rate influences what banks can pay on deposits, but each firm sets its own savings rates — often with a lag. Product mechanics: easy-access savings, notice vs fixed-rate savings. This page does not forecast Bank Rate or CPI.
Date-stamp every figure. Do not treat unpublished September CPI or the 5 November Bank Rate decision as fact until they exist.
Bank Rate influences what banks can pay on deposits, but each firm sets its own savings rates — often with a lag. Product mechanics sit on the easy-access and notice-vs-fixed pages.
Why a “decent” AER can still lose purchasing power
If CPI is about 3% and a taxable easy-access account pays about 3% AER, the headline can look fine. After tax (if you have used up your Personal Savings Allowance), the real rate can sit near zero or turn negative.
That maths does not mean “never hold cash”. Cash still has a clear role for an emergency fund and near-term spending. It only means: watch purchasing power as well as the balance on the statement.
Worked example — illustration only
Assumptions:
- Balance: £10,000
- Advertised AER: 4.0% (variable), interest paid once a year for simplicity
- CPI over the year: 2.9% (the ONS July 2026 figure, kept as an illustrative stand-in)
- Ignore compounding quirks and fees
Step 1 — nominal interest
£10,000 × 4.0% = £400 interest → balance £10,400.
Step 2 — rough real check (before tax)
4.0% − 2.9% = about +1.1% real → purchasing power up a little in this illustration.
Step 3 — if inflation were higher than the rate
Same £10,000 at 2.5% AER with 2.9% CPI → rough real −0.4%. Balance rises to £10,250, but a typical basket that cost £10,000 may cost about £10,290 — fewer goods for the money, even though the statement shows growth.
Illustration only — not a forecast or a product rate.
Optional tax twist (still an illustration)
Same 4% AER for a higher-rate taxpayer who has already used their £500 Personal Savings Allowance: interest on the taxable slice is taxed at 40%, so the after-tax nominal rate falls and the real rate falls further. Keep your own tax position on GOV.UK — this is not tax advice.
Tax (Cash ISA vs taxable)
Personal Savings Allowance (PSA) — GOV.UK
- Basic rate: £1,000
- Higher rate: £500
- Additional rate: £0
Some lower earners can also use a starting rate for savings (up to £5,000 at 0% in the right circumstances). Details: GOV.UK.
Cash ISA
Interest inside a Cash ISA is usually tax-free within ISA rules. The overall ISA allowance is £20,000 in 2026/27. That can improve the after-tax nominal rate versus a taxable account if you would otherwise pay tax — still compare AER and access, not “ISA for its own sake”.
From 6 April 2027 (already announced from a prior fiscal event): Cash ISA limit £12,000 for under-65s; overall ISA limit stays £20,000. Detail belongs on ISA pages / the Autumn Budget scaffold.
Also from 6 April 2027 (GOV.UK technical note): savings income tax rates are scheduled to rise to 22% / 42% / 47%. PSA amounts are unchanged in that note. That is a future rule, not today’s rate.
Not tax advice.
FSCS is not inflation protection
| Tool | What it does | What it does not do re inflation |
|---|---|---|
| FSCS | Can protect eligible deposits if a firm fails — £120,000 per person per authorised firm from 1 December 2025. FSCS protection limits | Inflation is not a firm failure. FSCS does not top up your real return when prices rise |
| Personal Savings Allowance (PSA) | Interest that can be tax-free (GOV.UK): basic rate £1,000; higher rate £500; additional rate £0. Some lower earners: starting rate for savings up to £5,000 at 0% in the right circumstances | Does not change CPI. Only affects the after-tax nominal rate if you would otherwise pay tax on interest. Not tax advice |
| Cash ISA | Interest usually tax-free within ISA rules. Overall ISA allowance £20,000 in 2026/27. Can improve after-tax nominal vs a taxable account if you would otherwise pay tax — still compare AER and access | Does not guarantee a positive real rate. From 6 April 2027 (prior policy): Cash ISA limit £12,000 for under-65s; overall stays £20,000 — detail on ISA / Autumn Budget pages |
From 6 April 2027 (GOV.UK technical note): savings income tax rates are scheduled to rise to 22% / 42% / 47%; PSA amounts unchanged in that note — a future rule, not today’s rate. Not tax advice.
What this page is / isn’t
| Is | Isn’t |
|---|---|
| Explainer of real vs nominal | Rate tip sheet / product ranking |
| Dated ONS / Bank of England context | Inflation or Bank Rate forecast |
| Simple illustration | Product recommendation |
| High-level PSA / ISA | Full tax guide |
The Financial Services Compensation Scheme can protect eligible deposits if a firm fails — £120,000 per person per authorised firm from 1 December 2025: FSCS protection limits.
Inflation is not a firm failure. FSCS does not top up your real return when prices rise.
What this page is / isn’t
- Is: explainer of real vs nominal; dated ONS / Bank of England context; simple illustration; high-level PSA / ISA.
- Isn’t: rate tip sheet; inflation or Bank Rate forecast; product recommendation; full tax guide.
Inflation and savings rates: FAQs
How does inflation affect your savings rate?
Your savings account shows a nominal interest rate. Inflation shows how fast prices rise. The gap between them — a rough real rate — helps show whether your money buys more or less over time. This page is an explainer only. It does not pick products.
What is a nominal savings rate (AER)?
The interest rate the bank advertises. AER (Annual Equivalent Rate) is a standard way to show interest including compounding. It is still a headline rate — how many pounds appear in the account.
What is a real savings rate?
Roughly nominal rate minus inflation. It asks: after prices rise, does the balance buy more or less than before? Purchasing power is what that balance can buy.
What is purchasing power?
What your savings balance can buy. When inflation outpaces the after-tax interest you earn, the statement can show growth while a typical basket of goods costs more — fewer goods for the money.
Does a rising balance always mean you are better off?
Not necessarily in purchasing-power terms. A balance can rise while still losing ground to prices if the real rate is negative. Cash still has a role for emergency funds and near-term spending.
What CPI and Bank Rate figures does this page use?
As of 11 October 2026: CPI 3.1% to August 2026 (ONS 16 September 2026); Bank Rate 3.75% (Bank of England). September CPI (due 21 October 2026) and the 5 November 2026 MPC decision were not published yet — do not treat them as fact until they exist.
Is the worked example a real bank rate?
No. The worked example uses round numbers for illustration only. It is not a forecast and not a product rate from any bank.
Does FSCS protect against inflation?
See FSCS is not inflation protection above.
Where can I compare easy-access nominal rates?
See easy-access savings accounts. This page does not list best AERs or product picks.
Where is notice vs fixed-rate savings compared?
See notice vs fixed-rate savings for locking a nominal rate versus keeping access. A fixed deal locks the nominal rate, not inflation.
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