Cash ISA savings are at record levels – but rates are disappointing
Now banks are grabbing tax benefits on YOUR Isa money: Savers are short-changed with floor rates
Savers who put their money in tax-free ISAs are shortchanged with lower interest rates than those on regular savings accounts.
Cash ISAs and regular savings accounts are broadly similar, except that any interest earned on the former is protected from tax.
However, the difference in interest paid between these two types of accounts has almost tripled in six months.
The best fixed-income bond now pays 0.85 percentage point more than the best fixed-income Isa.
This compares to a difference of 0.3 point in January. However, as interest rates continue to rise, a growing number of savers would be better off sticking with a Cash Isa, even if it means accepting a slightly lower rate.
Tax haven: Cash ISAs and regular savings accounts are broadly similar, except that all interest earned on the former is completely shielded from tax
Interest on non-ISA accounts is taxable as soon as you exceed your personal savings deduction.
Base rate taxpayers get a personal savings of £1,000 each year, the amount you can earn in interest in a taxable account before you pay tax.
For higher rate taxpayers it is £500 per annum, while higher rate taxpayers have no allowance.
Interest is taxed at your income tax rate, which is 20, 40, and 45 percent for basic, higher, and additional taxpayers, respectively. Although rates were low, very few savers were at risk of going over their benefits and facing a tax bill.
At the start of last year, Investec’s highest one-year bond stood at just 1.36 percent.
Then a base rate taxpayer could have about £73,000 in the account without breaking their allowance, while a higher rate taxpayer could have £36,700.
Now, with the top rate of 5.85 per cent on a one-year bond from Close Brothers Savings, this has dropped to a much meager £17,100 and £8,550 respectively.
If you had £10,000 in a fixed rate bond, you would earn £585 in interest over the year with the highest bond, but a lower £505 with an equivalent Isa.
But if you have to pay 20 per cent tax on your interest, the £585 comes out to a lower £468 interest. After 40 per cent goes to the taxpayer, you only get £351 in the non-Isa bond.
As interest rates rise, cash ISAs are becoming increasingly popular. But not all new banks offer Cash ISAs, so the competition is less fierce. SmartSave, Allica Bank and Atom Bank do not offer Cash ISAs.
And those that do tend to compete more on fixed income bonds. With Charter Savings, you earn 5.67 percent in a pre-tax taxable bond, but only 4.8 percent in the one-year Isa.
sy.morris@dailymail.co.uk