Savers Can Now Lock in 5% Interest Rates as Competition Heats Up

Savers now have a wider selection of options to earn 5% on their cash, as multiple providers have raised rates on one-year bonds in recent weeks. GB Bank has increased its rate to 5.05%, and Investec now offers 5%. Kent Reliance is providing 5.06% for a 13-month term.

These increases are occurring even as the Bank of England maintained its base rate at 3.75%. Banks and building societies are actively competing for savings, driving up rates on fixed-rate accounts. The current rates reflect market expectations of multiple base rate hikes by the end of 2027, a significant increase from the top rate of 4.4% a year ago.

However, savers must also contend with rising living costs. Inflation reached 3.1% for the year ending in August and is projected to climb further. To maintain the real value of savings, the interest earned must at least match inflation. With a 5% savings rate, the real return after accounting for current inflation is approximately 1.9%.

For cash Isas, top one-year fixed rates include Kent Reliance at 4.82%, Shawbrook and Charter Savings Bank at 4.81%, and Vida Savings at 4.8%. For two-year terms, these rates are 4.98%, 4.97%, 4.91%, and 4.9% respectively. For longer terms, five-year fixed rates can reach 5.25% with Shawbrook Bank and 5.2% with West Bromwich BS.

All these accounts are protected by the Financial Services Compensation Scheme up to £120,000. While Isa rates are generally lower, their tax-free status is a significant benefit. Basic-rate taxpayers are taxed on interest exceeding £1,000 annually, higher-rate taxpayers on amounts over £500, and additional-rate taxpayers have no allowance. At a 5% interest rate, a basic-rate taxpayer would exceed their allowance with £20,000 saved, and a higher-rate taxpayer with £10,000.

Starting in April, tax rates on savings are set to increase for all taxpayer bands, further reducing net returns. Basic-rate taxpayers will see their rate rise from 20% to 22%, higher-rate taxpayers from 40% to 42%, and additional-rate taxpayers from 45% to 47%. It is unlikely that the Chancellor will alter these changes in the upcoming budget as the government seeks to increase revenue.