The taxman says three and a half million people are due a refund, but two million will have to fork out for underpaid tax.
How your savings can still beat inflation
After a big fall in June, inflation went back up in July, but it's still possible to get an inflation-beating return on your savings.
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Consumer price inflation went up to 2.6% in July, which is relatively low in historical terms, so you might think it would be easy to find an inflation-beating savings account.
Trouble is, there are actually masses of accounts paying less than 2% - and even if you find an account paying 2.6% or more, you still have to factor in tax.
If you're a basic rate taxpayer, you'll have to pay at least 20% tax on that 2.6% interest, which will take your post-tax return down to 2.08%. If you're only getting 2.08% in interest, the real value of your savings will gradually be eroded away by inflation.
To keep up with inflation, you'll need to earn at least 3.25% interest on your savings. And if you pay a higher rate of income tax, you'll need to earn an even higher interest rate. Look at this table:
After-tax returns on savings accounts for different rates of income tax
| Tax rate | Savings rate before tax | Savings rate after tax |
|---|---|---|
| 20% (basic rate) | 3.25% | 2.6% |
| 40% (higher rate) | 4.33% | 2.6% |
| 50% (top rate) | 5.20% | 2.6% |
As you can see, a 50% taxpayer needs to find an account that pays 5.2% interest before tax if they want to keep up with inflation.
Bad news
The bad news is that there are no instant access accounts that pay 3.25% or more. The best instant access account on the market is the Nationwide BS MySave Online Plus account, which pays 3.06%.
So if you want to keep up with rising prices you'll have to lock away your money for at least a year. Then you can start to get an inflation-beating return.
For example, the Saga 2-Year Fixed Rate Savings account pays 3.8% interest a year. Yes, you'll have to lock your money away for two years, and the account is only available for people over the age of 50. But on the plus side, this account beats inflation by 0.55% for basic rate taxpayers.
If you're younger than 50, you can still easily beat inflation if you sign up for the Tesco Bank 2-Year Fixed Rate Saver account. This account pays 3.6% interest and the minimum balance is relatively low at £2,000. That means it's well within the reach of many savers.
If you want to see how these accounts compare with the competition, here are all the top fixed rate bond accounts for three years or less:
Top fixed rate bonds for three years or less
| Account | AER | Duration | Minimum deposit | Notes |
|---|---|---|---|---|
| BLME 3-Year Premier Deposit Account | 4% | Three years | £25,000 | Sharia'a compliant |
| AA 3-Year Fixed Rate | 4% | Three years | £1 | Operated by post |
| Saga 2-Year Fixed-Rate Savings | 3.8% | Two years | £1 | Only available to people aged 50+ |
| BLME 2-Year Premier Deposit Account | 3.75% | Two years | £25,000 | Sharia'a compliant account. No interest, just 'profit.' |
| Post Office 2-Year Growth Bond Issue 17 | 3.61% | Two years | £500 | |
| Tesco 2-Year Fixed Rate Saver | 3.6% | Two years | £2,000 | |
| United Trust Bank 1-Year Fixed Deposit | 3.46% | One year | £500 | |
| United Bank UK 1-Year Fixed-Term Deposit | 3.45% | One year | £2,000 | |
| Kent Reliance Limited Edition 1-Year Fixed-Rate Bond | 3.4% | One year | £1,000 | |
| Close Brothers Select Gold Fixed Account | 3.4% | One year | £1,000 | |
| BLME Sharia'a Compliant 1-Year Premier Deposit Account | 3.35% | One year | £25,000 | Sharia'a compliant account. |
Higher-rate taxpayers
Of course, none of the above accounts will deliver an inflation-beating return for higher rate taxpayers. Remember an account needs to pay at least 4.33% in interest if a higher rate taxpayer is going to keep up with inflation.
To get that kind of return you could sign up for one of the top five-year bonds. The highest paying bond is the BLME 5-Year Premier Deposit Account, which pays 4.6%. Because this is a Sharia'a compliant account, these payments aren't interest, but are 'anticipated profit'. It's important to note that the minimum balance on this account is £25,000.
So you may prefer the State Bank of India Hi Return Fixed Deposit, which pays 4.5% and only requires a minimum balance of £1,000.
ISAs
Higher rate taxpayers have one other option if they want to beat inflation. They can go for a cash ISA where they won't have to pay any tax.
The top instant access ISA - the Post Office Premier Cash ISA - pays 3.01% tax free. As that's a tax-free return, you're definitely beating inflation.
And you can get higher inflation-beating returns if you go for a fixed-rate Cash ISA. Check out the table below:
| Account name | Interest rate (AER) | Notice/term | Minimum deposit | Notes |
|---|---|---|---|---|
| Newcastle Champion ISA | 4.25% | Five years | £2,012 | Transfers in from other providers are permitted |
| BM Savings 5-Year Fixed-Rate ISA | 4.05% | Five years | £500 | Transfers in from other providers are permitted |
| Halifax ISA Saver Fixed | 4% | Five years | £500 | Transfers in from other providers are permitted |
| Halifax ISA Saver Fixed | 3.8% | Four years | £500 | Transfers in from other providers are permitted |
| Post Office Fixed-Rate Cash ISA Issue 7 | 3.7% | Three years | £500 | Transfers in from other providers are permitted |
| Santander 2-Year Fixed-Rate ISA | 3.6% | Two years | £500 | Transfers in from other providers are permitted |
| Post Office Fixed-Rate Cash ISA Issue 7 | 3.6% | Two years | £500 | Transfers in from other providers are permitted |
| Julian Hodge 1-Year Fixed Rate ISA | 3.35% | One year | £5,100 | Transfers in from other providers are permitted |
| Post Office Premier Cash ISA | 3.01% | Instant | £500 |
So hopefully you're now confident that you can get an inflation-beating return on your savings. The ball is now in your court; get cracking and switch your savings to a top savings account.
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8Comments
20/08/2012 08:18
Makes me laugh.
Government keeps telling people to take out a pension for your retirement and these suggestions for saving your money.
If most people can't afford to live for today. How are they suppose to save for the future? A future that looks bleak given current trends being set by mankind
20/08/2012 06:19
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