With inflation expected to tick up in the next few months and interest rates easing, now could be the perfect time to take advantage of inflation-beating savings returns.
More than 1,600 savings accounts currently pay returns that are higher than inflation, according to Moneyfacts Compare, and therefore protect the value of your savings from being eroded by rising living costs. It’s a far cry from the couple of years prior to November 2023, when no savings accounts beat or even matched inflation.
Here, we explain why grabbing a good Individual Savings Account (ISA) early in the tax year might be a sensible move, and where you can find the best rates.
Why is now a good time to get an ISA?
One of the actions taken by the Bank of England to combat spiralling inflation over the past couple of years has been to increase the base rate. This is the rate that it charges other lenders to borrow money from it, so it effectively dictates the movement of fixed mortgage and savings rates. In theory, higher interest rates should spur people to save more and spend less, reducing demand for goods and services and pushing inflation down.
High interest rates are painful for borrowers but benefit savers, who have seen returns jump across regular savings accounts, bonds, and both fixed and variable rate individual savings accounts.
However, lower inflation in recent months has meant interest rates have followed the same trajectory. The Bank of England cut the base rate in May to 4.25% and it seems likely that the next movement may also be a downwards one.
This means that now could be an ideal time to take advantage of a good inflation-beating ISA offering a fixed rate for at least a year, before they potentially disappear in coming months.
Having a savings account with an interest rate higher than inflation is really important if you want to maintain the purchasing power of your cash.
For example, “If you have £10,000 in an account earning 0.25%, with inflation at the current level of 2.6%, after one year, although the total balance including accrued interest would be £10,025, the real value after the effect of inflation would have reduced your spending power to £9,764.
“However, if you picked an ISA paying 4.50% tax-free, not only would the total balance have increased to £10,450 after a year, but more importantly, the real value would have grown too, giving you spending power of £10,178, so more than keeping up with inflation.”
Another good reason to make the most of your £20,000 cash ISA allowance now is that the government is currently planning ISA reforms, with widespread speculation that the Chancellor could reduce the cash ISA limit to as little as £4,000. You can find out more about this in our article Five reasons to be an ISA early bird.
What are the best ISAs right now?
There are a few different kinds of ISAs you can choose from if you want to take advantage of current high rates, but thinking long-term, your best bet may be a fixed-rate cash ISA.
This is an account where the attached interest rate is guaranteed for a certain term – usually one year, two years, three or five – meaning that even if interest rates drop this year, you’ll still receive inflation-beating returns for the duration of the account. Other types of cash ISA, such as notice cash ISAs, may offer slightly better rates for the time being, but these are usually variable rate accounts and so returns may drop this year as soon as interest rates start to fall.
Currently, the highest rates are attached to cash ISAs with one-year terms. While it is common for higher rates to be reserved for ISAs with longer terms, the opposite is true at the moment, as interest rates are widely expected to fall in the near future.
One of the best one-year fixed rate cash ISAs right now is from Santander, offering a 4.25% annual equivalent rate (AER). You’ll also get a £50 bonus if you pay in more than £10,000.
If you’re happy to tie up your savings for longer than a year, one of the best two-year fixed rate ISAs is from Cynergy Bank at 4.17%, though you can grab a three-year fix from Ford Money at 4.2% if you’re happy to tie your money up for a bit longer. The best five-year fixed rate ISA pays 4.16% AER and is from Secure Trust Bank
These are the highest rates at the time of writing (13/05/2025), but if you want a list of the best fixed and variable rate cash ISAs, updated weekly, check out our article Which cash ISAs pay the most interest?
Remember that with a fixed-rate account, you won’t usually be able to access your savings during the fixed rate term. Certain accounts do allow you to make withdrawals, but this will often result in an interest penalty, so it’s best avoided if you can help it. For example, making a withdrawal from any of the best one-year accounts mentioned above will result in you losing 90 days’ worth of interest. If you would like to be able to make withdrawals at a moment’s notice without penalty, consider an easy-access cash ISA instead.
Learn more about ISAs
If you’re not familiar with how ISAs work, it’s never too late to get to grips with them.
Simply put, an ISA is essentially a tax-efficient “wrapper” for your savings and investments. Any returns you generate from an ISA aren’t subject to income tax or capital gains tax (CGT), so even if you have savings accounts already, an ISA can be a really useful addition if you have used up your Personal Savings Allowance for the current tax year.
Read more about ISAs in our article Everything you need to know about ISAs and about how to make the most of your savings allowances in our article Are you paying unnecessary tax on your savings?
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