Savers should act now to protect their earnings, as there’s “a cost to waiting”

Even though fixed savings rates in December remain relatively competitive, the top accounts may not be around for long.

With many of the leading savings rates stalling or declining, and with further drops likely as the Bank of England is expected to lower the base rate next week, savers may find it more difficult to get a competitive return on their money.

Average fixed savings rates fell across the board by 0.03 percentage points or more between the start of November and the start of December as providers made reductions, analysis by Moneyfactscompare.co.uk reveals.

For example, the average one-year fixed rate dropped from 3.95% to 3.92% while the average five-year fixed rate saw an even larger drop from 3.93% to 3.88%.

“This year the top fixed bonds have been consistently paying above 4%, however, with the likelihood of a December base rate cut growing, this may not be the case for much longer,” Caitlyn Eastell, Spokesperson at Moneyfactscompare.co.uk, warned.

"Savers should try their best to be reactive as there is a cost to waiting," she added.

Top one-year bond bucks trend

But, despite this bleak picture, it hasn’t been all bad news for savers, as the leading one-year bond crept higher to reach 4.50% at the start of December, compared to 4.46% one month earlier. This leading rate has since increased even more to 4.55% AER.

The danger of fiscal drag

Moreover, despite falling rates resulting in lower returns, frozen income tax thresholds are putting even more pressure on some savers.

The Chancellor of the Exchequer, Rachel Reeves, confirmed in the Autumn Budget that income tax thresholds would be frozen until April 2031, which means more people may be pulled into higher tax bands. This could then result in more savers being taxed on their savings interest.

What is fiscal drag and how does it affect my savings?

Fiscal drag is when inflation pushes wages up but, because income tax thresholds are unchanged, more people may move into a higher income tax bracket.

This can affect your savings because basic-rate taxpayers can earn up to £1,000 per year in savings interest without paying tax, thanks to their Personal Savings Allowance (PSA) but, if they start to pay a higher-rate of income tax, their PSA will halve to £500.

“Over the next few years millions of savers will be hit hard by fiscal drag as basic-rate payers move up to higher income tax brackets,” Eastell explained.

“With inflation still running above target, plus potentially footing an unexpected tax bill, this may mean that savers’ nest eggs could rapidly be losing ‘real’ returns,” she cautioned.

And, from April 2027, the impact of fiscal drag could become even more damaging to savers as the rate of tax on savings interest will rise by two percentage points.

However, savers can still be proactive about managing their money effectively to ensure they get the best return possible on their savings. One of the ways to do this is to regularly check the latest rates and switch providers if your existing account isn’t paying a competitive rate.

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Our charts are updated throughout the day to allow you to compare the best savings rates available. If you’re looking to lock in a guaranteed return, visit our fixed bond charts.

How a cash ISA can help you avoid tax on your savings

Savers who are worried about being taxed on their savings could consider a cash ISA instead, as these accounts allow you to earn tax-free interest.

For example, Eastell points out that a higher-rate income taxpayer with £14,500 in a non-ISA savings account earning interest of 3.40% is close to breaching their £500 PSA.

Furthermore, if they deposit £20,000 in this account, they would earn £840 in interest, which means they would need to pay tax on the £340 of interest that’s above their PSA.

By contrast, if they deposit £20,000 (their full ISA allowance) in the top one-year ISA paying 4.30% AER, the £840 they earn in interest will be exempt from tax.

Compare ISAs

Want to make the most your tax-free ISA allowance? Discover the latest rates on our ISA charts, including easy access ISAs and fixed rate ISAs.