Savers locked into fixed-rate cash Isas are being short-changed with bonds offering a better deal

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Savers locked into fixed-rate cash Isas are being short-changed with bonds offering a better deal

  • New banks have pushed up rates on fixed-rate bonds 
  • The top one-year rate now at 2.15% – its highest level for more than 2.5 years
  • The top one-year fixed-rate cash Isa at 1.46% comes from Bank of Cyprus online

Sylvia Morris for Money Mail

Savers locking into fixed-rate cash Isas are being short-changed, Money Mail analysis shows.

New banks have pushed up rates on fixed-rate bonds, with the top one-year rate now at 2.15 per cent – its highest level for more than two‑and-a-half years.

But cash Isas have failed to rise in line, with the best deal stuck at just 1.46per cent. The last time one-year fixed-rate bonds paid as much as 2.15per cent – in December 2015 – the top cash Isa equivalent stood at 1.76per cent – a difference of 0.39 percentage points. Now the gap has shot up to 0.69 points.

Savers locking into fixed-rate cash Isas are being short-changed, Money Mail analysis shows

Savers locking into fixed-rate cash Isas are being short-changed, Money Mail analysis shows

Savers locking into fixed-rate cash Isas are being short-changed, Money Mail analysis shows

It means you’d earn an extra £69 extra interest a year on £10,000 in the bond – or £138 if you put your full £20,000 Isa allowance into a bond rather than an Isa.

Even if you pay 20per cent tax on the interest from your bond, you would still end up with £172 after tax on each £10,000, against £146 in a tax-free cash Isa. Basic-rate taxpayers end up with much more in their pocket in taxable accounts, thanks to the personal savings allowance.

This gives them their first £1,000 of interest a year tax-free. Higher-rate payers get £500. HMRC says the allowance means 98per cent of savers pay no tax on their interest.

Before the arrival of the personal savings allowance, money poured into cash Isas at the start of each tax year. In April 2015, a huge £1.1 billion went into cash Isas as savers looked to use these tax-free accounts. But this April, £142 million came out of them.

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Sue Hannums, director at money advice site Savings Champion, says: ‘There has always been a gap but it has got wider, so there is little incentive to use your cash Isa allowance.

‘These accounts have long-term tax-free benefits. But it’s an argument that gets harder to push when the gap is widening.’

If you ignore cash Isas, your interest may be taxable in the future as rates continue their upward path. More interest could bust your personal savings allowance. And you can’t carry over your annual cash Isa allowance from one year to the next.

You can have just over £46,000 in a one-year taxable bond at 2.15per cent with Wyelands Bank and stay within your £1,000 personal savings allowance. If you earned 2.5per cent, tax starts to bite on a £40,000 savings pot for basic-rate tax payers and at £20,000 for higher-rate payers.

The top one-year fixed-rate cash Isa at 1.46per cent comes from Bank of Cyprus online or from Virgin Money in the High Street. Coventry BS pays 1.5per cent, but you have to tie your money up until November 30 next year.

Online provider Wyelands Bank pays the top 2.15per cent one-year fixed rate on its bond.

For two years, Wyelands pays 2.25per cent, with Paragon Bank, Hampshire Trust Bank and BM Savings at 2.2per cent. On cash Isas, the best two-year deal is 1.7per cent from Shawbrook and Paragon banks online or 1.55per cent in the High Street from Leeds BS or Cambridge BS.

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