Inflation is eating your savings. Here’s how to fight back
UK inflation is back above 3%, and cash that looks safe may be losing value every year. How cash ISAs, Premium Bonds and gilts stack up against rising prices.
Reviewed, edited and approved by Editor-in-chief Daniel Sköld · Updated 23 October 2026
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Your savings statement looks reassuring. The number went up, there’s interest on it, and nobody has lost a penny. Then you fill the car, do the big shop and pay the energy bill, and some quiet part of your brain starts doing sums.
That part of your brain has a point. The Consumer Prices Index rose by 3.5% in the 12 months to September 2026, up from 3.1% the month before, according to the Office for National Statistics. If your money is earning less than that once tax is taken off, you’re getting poorer slowly, and the bank statement won’t tell you.
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How much does inflation really cost my savings?
More than it feels like. Say you have £50,000 in cash and prices rise by 3.5% a year for ten years. By the end, the same shopping costs about 41% more. Your £50,000 would then buy roughly what £35,400 buys today. You haven’t lost a penny in cash terms. You’ve lost about £14,600 in what the money can actually do.
Interest helps, of course, but the number that matters is the real return: what you earn after tax, minus inflation. An easy-access account paying 2% while prices rise by 3.5% is losing you about 1.5% a year. You just don’t see it written down anywhere.
Interest rates aren’t racing to help either. In September 2026 the Bank of England held Bank Rate at 3.75%, although three of the nine members of its Monetary Policy Committee voted to raise it to 4%. Savings rates tend to follow Bank Rate, and the best deals don’t last long.
The tax trap that makes a good rate worse
This is where many people in their peak earning years get caught. The Personal Savings Allowance lets basic-rate taxpayers earn £1,000 of interest a year tax-free. For higher-rate taxpayers it drops to £500, and additional-rate taxpayers get nothing.
Here’s a worked example. A higher-rate taxpayer has £50,000 in an account paying 4.5%. That’s £2,250 of interest. Take off the £500 allowance and the other £1,750 is taxed at 40%, which costs £700. What’s left is £1,550, a return of 3.1%. That’s below inflation. A headline rate that seemed to beat rising prices doesn’t once HMRC has had its share.
Scottish taxpayers should note that savings interest is taxed using the UK rates and bands, not the Scottish income tax rates. So the Personal Savings Allowance works the same way whether you live in Edinburgh or Exeter. Which band you fall into still depends on your total income, though.
The real question isn’t what your savings pay. It’s what they pay after tax, compared with what things cost.
Is a cash ISA still worth it?
For many readers, yes. Interest earned inside an ISA is free of income tax, so the rate you see is the rate you keep. In the example above, a cash ISA paying the same 4.5% would keep the full £2,250. The overall ISA allowance is £20,000 a year.
The rules change from 6 April 2027. From then, if you’re under 65 you can put only £12,000 a year into a cash ISA. The overall £20,000 allowance stays, but the remaining £8,000 must go into another type of ISA, such as a stocks and shares ISA. If you’re 65 or over, you can still put the full £20,000 into cash. That applies from the start of the tax year in which you turn 65. If you’re in your fifties and keep a lot of money in cash, the remaining 2026/27 tax year is your last chance to put the full £20,000 into a cash ISA.
Be clear about what a cash ISA can’t do. It protects your interest from tax, not from inflation. If the best ISA rate you can find is below inflation, you’re still losing value, just more slowly.
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Do Premium Bonds beat inflation?
Sometimes, on paper. Premium Bonds don’t pay interest. Instead, each £1 bond is entered into a monthly draw. NS&I currently puts the annual prize fund rate at 4.35%, variable, with odds of 21,000 to 1 for each £1 bond. Prizes run from £25 to £1 million. They’re free of income tax and Capital Gains Tax, and you can hold up to £50,000.
For a higher-rate taxpayer who has already used the savings allowance, a tax-free 4.35% can look appealing next to a taxed savings account. Your money is also fully backed by HM Treasury, and that guarantee has no upper limit.
The catch is that the prize fund rate is an average. A few big winners pull it up, so many holders, especially those with smaller amounts, win less than the headline rate in a typical year. Some win nothing at all. The rate also moves: NS&I cut it to 3.3% in April 2026 before raising it again. Premium Bonds are a reasonable home for safe money. They’re not a reliable way to beat inflation.
Gilts, index-linked gilts and the long game
Gilts are bonds issued by the UK government. They’ve become popular with savers who pay higher-rate tax, for one reason in particular: profits on gilts are free of Capital Gains Tax. Gilts with a low coupon (the interest they pay) can be bought below their face value. If you hold one until it matures, most of your return comes as a tax-free gain, and you know the return when you buy.
Index-linked gilts go further. Both the interest and the amount you get back at the end rise with inflation. That’s currently measured by the Retail Prices Index, which was 3.4% in August 2026. RPI is due to be brought into line with CPIH from 2030, which would generally mean slightly lower uplifts. These gilts are the closest thing to a direct hedge against inflation, but only if you hold them to maturity. Sell early and you get the market price, which can move a lot when interest rates change.
For money you won’t need for ten years or more, history suggests that shares have beaten inflation more often than cash has. That might be money in a stocks and shares ISA or a pension. The price is volatility: losses along the way that you need to be able to sit through.
Most people don’t need to choose one of these. A sensible plan often splits money by when you’ll need it: an emergency fund in easy-access cash, money for the next few years in fixed-term savings, ISAs or gilts, and long-term money invested. Midcent can’t tell you which mix suits you. MoneyHelper offers free guidance, Pension Wise covers pension choices if you’re 50 or over, and an FCA-regulated financial adviser can look at your whole situation.
In short
With CPI at 3.5% in September 2026, any savings earning less than that after tax are losing value in real terms, even though the balance keeps going up. Cash ISAs protect interest from tax but not from inflation. Premium Bonds are tax-free but the prize fund rate is only an average, and index-linked gilts only track inflation if you hold them to maturity. Work out your real return, use your cash ISA allowance before the £12,000 limit for under-65s arrives on 6 April 2027, and get guidance before making big decisions.
Andrew Ingram writes about money for men 45 and over – the years when retirement starts to feel real and the decisions get bigger. Pensions and retirement planning, investing, savings, mortgages and tax: what changed, what it means for your plans and what's worth doing about it. No hype, nothing to sell, and a clear steer on when it pays to get personal advice.
One of Midcent's writers. Spotted something? Write to andrew@midcent.uk.
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