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Money Mail today calls on banks and mortgage banks to give Isa savers with cash a better deal.
Savings rates have risen to ten years this year – and are about to jump even higher if the Bank of England continues to raise key rates as expected.
It means tax-free cash Isas is back in the spotlight as savers try to protect their returns from the clutches of HMRC.
Tax-free: Savings rates have risen to ten years this year, meaning cash Isas is back in the spotlight as savers try to protect their returns from the clutches of HMRC
Our best cash Isa savings tables
Still, many providers pay much lower rates than on nearly identical regular accounts. In the worst case, savers can be short of as much as 1.9 percentage points.
Meanwhile, some companies, including Britain’s largest construction company Nationwide, are not offering fixed-income Isas to new customers at all.
Others, such as Virgin Money, only let you open an account online.
And many major High Street banks are still paying a pittance on all deals, despite seven key rate hikes.
Cash Isas lost its luster after the introduction of the annual personal allowance in 2016.
This allows base rate taxpayers to earn up to £1,000 in interest per year tax-free – or £500 if you earn more.
Because the rates were so low for so long, few were at risk of exceeding this annual limit.
A year ago, when the most accessible rate was a meager 0.65 percent, you could have £154,000 in an account before paying tax – or £77,000 as a higher rate taxpayer.
But with a top rate of 2.35 percent now, you’ll owe tax as soon as your balance exceeds £42,500 and £21,250 respectively, according to research by investment firm AJ Bell.
Duty Free Isas are the easy answer to this problem – and you can deposit up to £20,000 a year.
In 2015, the year before the introduction of personal savings, savers collected more than ten million cash Isa’s.
But in the fiscal year to April 2021, that number had fallen by a fifth to eight million.
Even after interest rates started to rise this year, data from the Bank of England shows that about £3.7bn of Isas was withdrawn between January and August.
Over the same period, £30 billion was piled up in regular, easily accessible and fixed deals. But with interest rates rising rapidly, cash Isas is poised for a comeback. And the tide is already turning.
Yorkshire Building Society told Money Mail it saw a 30 percent increase in the amount of cash Isas opened between August and September.
Coventry BS says it has also seen a surge in applications, with more savers switching providers.
But while Isa cash rates have risen, they often lag behind regular bills. Kent Reliance pays 4 percent on its one-year bond, but only 3.2 percent on its one-year fixed-rate Isa.
And with Charter Savings Bank, the gap is even wider after the one-year bond hike to a leading 4.4 percent today, while the Isa rate remains at 2.5 percent.
Isas are more difficult to set up and slightly more expensive to manage. But industry insiders told Money Mail that this should only result in a price differential of up to 0.3 to 0.4 percentage points.
And the gap should be even smaller on easily accessible accounts.
Justin Modray, of independent advisor Candid Financial Advice, adds: “By being cynical, they are essentially pocketing savers’ tax cuts, as it doesn’t cost that much more to run an Isa.”
The good news is that the gap is starting to close.
Even after interest rates started to rise this year, data from the Bank of England shows that approximately £3.7bn was withdrawn from Isas between January and August.
In January, the top one-year fixed bond paid 1.35 percent, while the highest equivalent Isa rate was 0.95 percent. It meant you could end up earning less with an Isa, even if you had to pay 20 percent tax.
But research by Savings Champion shows that the average, easily accessible Isa interest rate has risen 21 percent since the beginning of September, from 1.62 percent to 1.97 percent.
The typical regular easy access rate is up just 11 percent to 2.35 percent, though it’s still higher.
The most accessible Isa now pays 2.25 percent of Coventry BS – as long as the saver doesn’t make more than six withdrawals a year.
The highest amount you can earn in an equivalent taxable account is 2.35 percent (1.88 percent after base rate tax) at Al Rayan Bank.
After years of paying pittances, Santander has also joined a competitive one-year 3.7 percent deal for new savers. It is hoped that this may encourage other major carriers to follow suit.
Rachel Springall, financial expert at data analyst Moneyfacts, says: “savers who ignore Isas are missing out on the long-term tax benefits, especially because there is no predicting how long the personal savings deduction will last.”
sy.morris@dailymail.co.uk
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