High-interest savings accounts have many benefits.
You can generally access your money the moment you need it; you know exactly how much you have at any moment; and depending on your account’s features it’ll give you a return - sometimes quite a high one.
Plus, at least in Australia, the government will guarantee up to $250,000 per account holder, per bank as long as you hold it in a legit bank. (The fancy-pants term for that is Authorised Deposit-Taking Institution - here’s the Australian list.)
So far, so good.
Savings accounts are very low risk, according to Moneysmart, and appropriate for short-term goals, like money you might need in the next 1-3 years.
So what’s the catch?
It’s not a catch, but it can catch you up.
The headline interest rate on a savings account - even one that’s paying up to 6% - isn’t actually how much value you’ll get.
Here’s why.
Jump straight to
- 1. High inflation does a number on the real value of your balance
- 2. Interest counts as income on your tax return
- 3. The interest you keep can depend on your tax bracket
- 4. Most people don’t earn the full bonus interest amount
- What’s the takeaway?
1. High inflation does a number on the real value of your balance
The Australian Bureau of Statistics tracks household inflation using a measure called the Consumer Price Index (CPI).
The CPI is used as a barometer of the economy and has wide-reaching impacts, including how the RBA sets the cash rate (which leads mortgage interest rates to rise and fall), which can reduce how much money people have left over to spend.
In the 12 months to June 2026, the CPI was 3.8%, which means Aussies were paying 3.8% more for a wide selection of things than we were a year prior.
The RBA’s target is to use its levers to keep the CPI between 2-3%.
What does that do to your money?
If you had money in a shoebox, didn’t add to it, and it earned no interest at all, that money lost 3.66% of its purchasing power in the year to June 2026.
(The purchasing power maths is one divided by one plus the inflation rate, so 1 ÷ 1.038 = 0.9634, and a dollar keeps 96.34% of its buying power. Over several years, you’d multiply each year's rate together rather than adding them up.)
Ten thousand dollars in the shoebox now buys what $9,634 bought a year ago.
And it needs to grow 3.8% to $10,380 just to pay for the same amount.
Here’s something to keep in mind.
If inflation sits at 2% for 35 years and you keep your money in the shoebox, it halves in value, and its purchasing power is just $5,000.
This is purely hypothetical and just to illustrate the example.
So high interest accounts are the move, right?
2. Interest counts as income on your tax return
It’s felt like one of the perks of the high interest rate environment of the past few years is finally seeing interest make an impact on your savings.
Here’s an illustrative example of how that works.
Let’s say in June last year you put $10,000 into a high interest account paying 5% interest compounding monthly.
It was part of your new financial year’s resolution to be smarter with money, and it’s a commendable move.
After 12 months
12 months later, and thanks to your high interest rate, that $10,000 is up to $10,511.62, assuming no other fees, charges, or deposits.
So you’ve beaten inflation by $131.62.
It’s money you earned by being patient and keeping your goals in mind.
Then tax enters the picture
The trouble is, the government sees the whole $511.62 interest payment as income, not just the amount that beats inflation.
It gets added to your taxable income, and you pay tax on it at your marginal rate (or if you didn’t give your ADI your tax file number, tax may be withheld at the highest rate. If this happens to you, you can generally get some of it back.)
So if you’re in the highest tax bracket, you’d pay $240.46 tax, and you’d be left with $271.16.
Now you’ve lost to inflation by $108.84.
Some caveats here.
Your personal circumstances including your tax rate will impact the amount of tax you pay, and you’ll want to seek licensed professional advice before making any choices based on this information.
Inflation is based on a lot of factors, and past performance doesn’t mean the future will play out the same way.
3. The interest you keep can depend on your tax bracket
The short of it is the more taxable income you earn, the higher your tax bracket, the more tax you may pay on interest.
Here’s an example of how it might work for someone earning a $98,000 salary who was paid $2,000 in interest over a financial year, totalling $100,000 exactly in taxable income.
This example assumes they have no other sources of income, and it’s purely illustrative which means it doesn’t account for any other income, fees, charges, transactions, deductions, or changes in interest or inflation rates.
These variables show why your personal situation will be different.
First, they start with their marginal tax rate and add 2% for the Medicare levy
In this case, their marginal tax rate is 30%, because they fall into the $45,001 - $135,000 tax bracket which gets taxed at 30%.
Then they add the Medicare levy, which brings them to 32%.
Next, they work out the share of every dollar of interest they get to keep
For them, because they’re paying 32% tax, they get to keep 68c of every interest dollar.
This means from their $2,000 interest, they’re keeping $1,360 after tax.
If their interest tipped them into a higher tax bracket, the portion that fell into the higher bracket would be charged the higher rate of tax.
Then, they divide inflation by what they keep
CPI rose 3.8% in the year to June 2026.
They divide 3.8% by 0.68 (the 68c of every interest dollar they get to keep) and find it totals 5.59%.
Now, they know that an account would need to pay 5.59% for their money to keep pace with inflation after tax.
How we got there and what it means
In dollar terms, in this example, the $2,000 interest payment comes from a $40,000 savings balance paying 5%.
To preserve the buying power of this $40,000 savings balance, it needs to grow by $1,520 to keep pace with 3.8% inflation.
But after $640 in tax, they keep just $1,360, leaving them $160 short.
So they need their account to pay 5.59%.
4. Most people don’t earn the full bonus interest amount
It feels good having a high interest rate on your savings account.
Earning it can be a whole other thing.
In 2023, the Australian Competition & Consumer Commission (ACCC) found that several banks couldn’t tell them how many of their customers missed out on the full bonus rate amount of their savings accounts.
In the first half of that year, 71% of bonus-interest savings accounts didn’t receive bonus interest in any given month.
This is because there are often conditions attached to earning the high headline rates, including making minimum deposits, linking transaction accounts, and maintaining and increasing their balance.
For example, a high interest savings account currently pays 5.40% p.a. interest, but if you don’t meet the minimum requirements you’re down to earning 2.25% p.a.
What’s the takeaway?
You don’t have to do anything with this information except keep it in mind.
If you feel like it’s been harder than usual to get ahead - or even just to keep pace - it’s in part because of factors we don’t have any control over as individuals, such as CPI and monetary policy.
But sometimes they cross paths with choices we can actively make, such as how much of our money to keep in savings, and whether we want to pursue other avenues for building our long-term wealth.
