How does inflation affect cash savings?

Inflation means prices rise over time, so the same amount of money buys less. If the interest on savings is lower than inflation, the buying power of that money falls even though the balance goes up.

Bank of England inflation target: 2%; Set by the government, measured by the Consumer Prices Index (CPI).; Bank of England: What is inflation?
FSCS deposit protection: £120,000; Per eligible person, per authorised bank, building society or credit union, from 01/12/2025 (it was £85,000 before). Includes cash ISAs.; FSCS: Banks, building societies and credit unions
Personal Savings Allowance: £1,000 / £500 / £0; Tax-free savings interest for basic, higher and additional rate taxpayers respectively.; GOV.UK: Tax on savings interest (how much is tax free)
Starting rate for savings: Up to £5,000; Of interest tax-free if your other taxable income is under £17,570. Every £1 of other income above the Personal Allowance reduces it by £1.; GOV.UK: Tax on savings interest (how much is tax free)

Tax year 2026/27. Checked 22/09/2026.

What inflation is

Inflation is the rate at which prices go up. In the UK it is usually measured by the Consumer Prices Index (CPI), which compares the price of a typical basket of goods and services with a year earlier. If CPI inflation is 2%, a basket that cost £100 a year ago costs £102 today.

The government sets the Bank of England a target of keeping inflation at 2%. The Bank of England says CPI inflation averaged 2% between 1997 and 2021, rose from 2021 and peaked at 11% in 2022, and has fallen since.

Real interest rates

The interest rate on an account is the “nominal” rate: how much the balance grows in pounds. The “real” interest rate is roughly the interest rate minus inflation. It shows whether the money can buy more or less than before.

An illustration with made-up numbers: £1,000 in an account paying 3% a year becomes £1,030 after a year. If prices rose 4% over the same year, things that cost £1,000 now cost £1,040. The balance is higher, but it buys less. The real interest rate was about minus 1%.

Tax on interest also matters: interest above your tax-free allowances is taxed, which lowers the return after tax.

Tax on savings interest

In 2026/27 the Personal Savings Allowance lets basic rate taxpayers earn £1,000 of interest tax-free, higher rate taxpayers £500 and additional rate taxpayers nothing. If your other taxable income is under £17,570, the starting rate for savings can make up to £5,000 of interest tax-free. Interest in a cash ISA is tax-free and does not use these allowances.

From 06/04/2027, savings interest above the allowances is taxed at 22%, 42% or 47% (set by the Finance Act 2026), two percentage points higher than in 2026/27.

What cash does and does not do

Money in a savings account does not fall in pounds and can usually be reached quickly, depending on the account. Its value in terms of what it buys depends on the interest rate compared with inflation.

FSCS protection for savings

If a UK-authorised bank, building society or credit union fails, the Financial Services Compensation Scheme protects up to £120,000 per eligible person, per firm. The limit rose from £85,000 on 01/12/2025. The FSCS says it pays deposit compensation automatically, within seven working days of a firm failing, although complex cases take longer.

The limit covers all your money with that firm together. Brands that share one banking licence count as one firm.
Joint accounts are protected up to £120,000 for each eligible account holder.
Cash ISAs held with a UK-authorised bank or building society are included.
Certain temporary high balances, such as money from a house sale, are protected up to £1.4 million for up to six months.

Cash and investing

Investing can give the chance of returns above inflation, with no guarantee, and it brings the risk of losing money. The guide on investing and saving explains the differences. The balance between the two depends on individual circumstances; MoneyHelper offers free, impartial guidance.

Capital at risk. Past performance is not a guide to future returns. The value of investments can fall as well as rise.

Questions people ask

›What is a real interest rate?

Roughly, the interest rate minus inflation. If savings earn 3% and prices rise 4%, the real rate is about minus 1%: the balance grows but buys less.

›How much of my savings is protected if my bank fails?

Up to £120,000 per eligible person, per authorised firm, from 01/12/2025. The limit covers all your deposits with that firm, including cash ISAs.

›Is the FSCS limit £85,000 or £120,000?

For bank, building society and credit union deposits it has been £120,000 since 01/12/2025; it was £85,000 from 30/01/2017 to 30/11/2025. The £85,000 limit still applies to investment firms that fail.

›Is a joint account protected up to £240,000?

Protection is £120,000 per person for each banking licence. In a joint account, each holder’s share counts towards their own £120,000, so two people with no other money under the same banking licence are covered up to £240,000 in total. Money held in other accounts with the same bank or banking group counts towards the same limit.

›Do I pay tax on savings interest?

Only on interest above your allowances. In 2026/27 the Personal Savings Allowance is £1,000 for basic rate, £500 for higher rate and £0 for additional rate taxpayers. Cash ISA interest is tax-free.

›What is the Bank of England’s inflation target?

2% a year, measured by the Consumer Prices Index. The target is set by the government.

Related guides

Sources

This is information, not advice. Tax treatment depends on your circumstances and can change. For free, impartial guidance, MoneyHelper (backed by the government) can help; for a personal recommendation, speak to a regulated financial adviser.