The Bank of England has increased interest rates from 3.75% to 4%, marking the first rate increase since August 2023. These rates influence the interest banks charge borrowers and pay savers.
Why Interest Rates Increased to 4%
The Bank of England wants to bring inflation back towards its 2% target. Inflation measures how quickly prices rise, and in September 2026, UK inflation reached 3.5%. Higher oil and gas prices have pushed up costs, so households face pressure from fuel and energy bills.
The Bank now expects inflation to reach around 5% by the middle of 2027. However, this is a forecast, not a certainty.
Affect on Savers
Higher interest rates can bring better returns on savings. However, banks do not always pass on the full increase.
Therefore, check your current savings rate and compare available accounts. Additionally, consider whether you need easy access to your money. A higher advertised rate may offer little benefit if withdrawal restrictions do not suit your needs.
Moreover, tax rates on savings interest is increasing from April 2027.
| Tax Rate | 2026/27 | 2027/28 |
|---|---|---|
| Basic Rate | 20% | 24% |
| Higher Rate | 40% | 44% |
| Additional Rate | 45% | 49% |
Tax applies to interest earned, not the savings balance. Interest earned within an ISA remains tax-free.
Affect on Mortgages
Your mortgage type determines how quickly you might notice a change.
| Tracker Mortgages | Your interest rate usually follows the Bank’s base rate (so your repayments could rise soon) |
| Standard Variable-Rate Mortgages | Your lender may increase its rate (although it controls the timing and size of any change) |
| Fixed-Rate Mortgages | Your existing rate stays the same until your fixed deal ends (but you could face higher costs when you re-mortgage) |
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This article is for general informational purposes only and does not constitute legal or financial advice. While we aim to keep our content up to date and accurate, UK tax laws and regulations are subject to change. Please speak to an accountant or tax professional for advice tailored to your individual circumstances. Pi Accountancy accepts no responsibility for any issues arising from reliance on the information provided.