How to beat inflation

how to beat inflation

Are your savings losing value because of inflation? Here’s how to get a decent return on your money.

If you want to make a return on your savings, you need to beat inflation. If you don’t, the value of your savings will shrink over time instead of grow.

Inflation currently stands at 1.5%

The trouble is, savings rates are at an all-time low at the moment, with many accounts paying piddling rates of interest (some as little as 0.2%!). That’s not good for savers.

How much interest do I need to beat inflation?

The amount of interest you need to beat inflation depends on your tax rate:

  • A basic rate taxpayer at 20% needs to find a savings account that pays at least 3.4% to beat inflation.
  • A higher rate taxpayer at 40% needs to find an account paying at least 4.5% to beat inflation.

Unfortunately, accounts that pay these rates are thin on the ground at the moment. The good news? It IS possible to beat inflation. (Or at the very least, to limit the damage it does to your savings).

So what are your options?

1. Beat inflation with ISAs

beat inflation with isasIf you’ve got any savings or investments, the first thing you should do is make sure you have an ISA.

Why should you have an ISA?

  • They offer tax-free savings – year after year
  • Many ISAs accept ‘transfers in’ – so you can move your ISA savings to another ISA when interest rates go up
  • As ISAs are exempt from income tax, you only need to find an ISA that pays 2.4% or more to beat inflation.

You can currently save up to £11,520 a year into an ISA (up to £5,760 of that can be in a cash ISA).

It’s true that ISA interest rates have dropped like a stone in recent years, but they still allow you to build a nest egg that remains tax-free year after year. That reason alone makes them worth having.

Find out more with our guide to cash ISAs and when to invest in a stocks and shares ISA.

2. Beat inflation with a current account – earn up to 5% interest

beat inflation with a current accountNationwide FlexDirect account

Nationwide’s FlexDirect account pays an excellent 5% interest, so beating the rate of inflation comfortably.

However, it only pays 5% interest on balances up to £2,500. It also only pays 5% interest for 1 year – after that, the rate drops to just 1%.

Santander 123 account

Santander’s 123 current account pays 3% interest on balances between £3,000 – £20,000.

This rate isn’t quite enough to beat inflation, but it’s not far off (for basic rate taxpayers at least). It also pays between 1-3% cashback on many household bills (such as council tax and energy bills).

Santander’s account has both advantages and disadvantages:


  • You need to have £3,000 or more in the account to get 3% interest (£2,000+ gets you 2% interest, £1,000+ gets you 1% interest)
  • You must pay in at least £500 a month
  • The account has a £2 monthly fee


  • Earn up to 3% interest
  • Pays 1-3% cashback on bills such as council tax, energy and phones (which should easily cover the £2 monthly fee – most people earn between £5-£10 cashback a month)
  • Can make unlimited cash withdrawals (though if your balance drops below £3,000, your 3% interest will drop to 2%).

3. Beat inflation with a ‘regular savings’ account – earn up to 6% interest

Beat inflation with a regular savings accountRegular savings accounts are designed to encourage regular saving. You usually save money into the account every month, and you may not be able to access your money easily. In return, these accounts tend to pay out a higher rate of interest.

First Direct Regular Saver

You can earn an impressive 6% interest with First Direct’s Regular Saver (this rate of interest is fixed for a year).

You’ll need to make a minimum monthly deposit of £25 (up to a maximum of £300 each month) during the 12 month fixed term, and you can’t make any withdrawals.

Important: There is a catch to this deal. To get their 6% Regular Saver account, you need to have a current account with First Direct.

The good news is, it’s easy to switch – and the First Direct account regularly comes top of customer satisfaction polls. (Plus if you do switch your current account to First Direct, they’ll give you a £100 bonus!)

Barclays Monthly Saver

Barclays Monthly Saver account pays a fixed rate of 3.25% AER for a year. You can save between £20 and £250 each month.

If you make any cash withdrawals from the account, you’ll get 3.03% interest the following month instead of 3.25% (still a good rate).

But if you haven’t used up your ISA allowance for this year, don’t forget that Nottingham Building Society offers up to 4% with its regular saver ISA.

4. Beat inflation with a children’s account – earn up to 6%

beat inflation with a children's accountDid you know that some children’s accounts pay up to 6% interest? If you have a child aged 0-15, there’s no reason you shouldn’t take advantage of this by opening an account on behalf of your child.

Halifax Kids’ Regular Saver

Halifax Kids’ Regular Saver pays an excellent 6% interest, fixed for a year.

You can pay in anything from £10-£100 a month, but no withdrawals are allowed.

Because the 6% rate only lasts for a year, the maximum you can pay in is £1,200 – but can still be a decent option given the rate of interest you’re getting.

5. Beat inflation with ‘peer-to-peer’ lending – earn up to 6.2%

beat inflation with peer to peer lendingSocial lending firms, or ‘peer-to-peer’ lenders, offer an alternative for savers looking to get a decent return on their money.

Peer-to-peer lenders are companies that allow you to lend cash directly to individuals or businesses – leaving the banks out altogether.

Because banks (with their big fees) are left out of the process, those lending money get higher returns – while businesses and individuals get lower cost loans.

There are currently three main peer-to-peer lending services: Zopa, Ratesetter and Funding Circle.

Zopa currently offers returns averaging 5.1% once all fees and bad debts have been factored in, while Funding Circle (which lends to small companies rather than individuals) offer returns averaging 6.2%.

Is peer-to-peer lending risky?

Peer-to-peer lending is really taking off in the UK – which isn’t surprising with the returns on offer.

But there are risks you need to take into account.

Firstly, peer-to-peer lending sites are not covered by the Financial Services Compensation Scheme (FSCS) – which protects the first £85,000 of your savings held in each banking institution, should the bank ever go bust.

Peer-to-peer lending is best suited to those who have some spare cash to invest, rather than those seeking a home for their main savings

Secondly, there is a chance that some borrowers will default and not pay back their loan. But there are safeguards to protect lenders:

  • Low default rate: All borrowers have to pass a strict credit check. Zopa says only 0.8% of loan amounts are not paid back by borrowers, while for Ratesetter the default rate is just 0.37%.
  • The risk is spread: The money you invest is normally divided across lots of different borrowers. For example: if you lend £2,000, your money is usually spread across at least 200 borrowers. In other words, you have plenty of eggs in plenty of different baskets – so one the rare occasion someone can’t pay, you shouldn’t lose much money at all.
  • Safety net funds: Both Zopa and Ratesetter have ‘safety net’ funds – basically a pot of money to cover the losses of any borrowers who default. In theory this should mean that lenders won’t any money at all – but as these companies aren’t covered by the Financial Services Compensation Scheme, there is no guarantee.

Who should go for peer-to-peer lending?

Peer-to-peer lending shouldn’t be viewed as a replacement for savings accounts (you won’t be able to access your money whenever you want, for a start, as you’ll be lending it to other people).

While peer-to-peer lending has been very successful so far, bear in mind that it is still a new industry that isn’t covered by the Financial Services Compensation Scheme. Also – despite the safeguards listed above – some borrowers do default on their loans.

So peer-to-peer lending does have an element of risk. It is best suited to those who have some spare cash to invest, rather than those seeking a home for their main savings.

However, if you have spare cash to invest, peer-to-peer lending can offer very decent returns.    

6. Beat inflation by earning some extra cash

bank notesOne way to counteract inflation is to earn a little bit of cash on the side. Of course, many people already have their hands full with a full-time job and/or family commitments, but it’s quite possible to make a bit of extra cash at home if you can spare an hour or two a week.

Have a look at our articles top 5 ways to make money from home and 10 ways to make money online to get started.

Also, it’s worth reading how to make a budget in under 30 minutes. It really will help make your money go further.

How to beat inflation – recap

  • Make sure you use your tax-free ISA allowance
  • Consider putting your money in more than one pot. For example, you could earn 5% on £2,500 with Nationwide’s FlexDirect account, and earn 6% on £1,200 with the Halifax Kids’ Regular Saver account, and 5% on £500 with Zopa.
  • Many accounts only pay a 5-6% rate of interest for a year. Mark the date in the diary, so that as soon as the interest rate drops, you remember to move your money to a better rate.