Savers ditch cash Isas for taxable deals

SAVERS are losing interest in cash Isas as the gap widens between tax-free rates and those on ordinary accounts.

In fact you can earn nearly two-thirds more interest by sticking to ordinary accounts.

A year ago the best rate, both on easy-access cash Isas and ordinary accounts, was 1.3 pc.

Today, the top-paying standard account is 1.1 pc from RCI bank, 22 pc more than the best easyaccess Isa deal of 0.9 pc from Coventry BS, Ford Money and Sainsbury’s Bank.

On fixed-rate deals, a year ago the gap stood at 21 pc with the best one-year offer at 1.4 pc on cash Isas and 1.7 pc on bonds. Since then, it has ballooned to a huge 35 pc.

The top one-year bond from Charter Savings Bank pays 1.55 pc against 1.15 pc on the best similar Isa from Bank of Cyprus UK.

Basic-rate taxpayers end up with much more in their pocket in taxable accounts, thanks to the personal savings allowance introduced in April 2016.

Basic-rate payers get their first £1,000 of interest a year in ordinary accounts tax-free. Higherrate payers get £500. HMRC says this means 98 pc of savers will pay no tax on their savings.

The lack of good deals has led savers to ditch Isas in favour of taxable deals.

In March, the amount in taxfree cash Isas plummeted by £774 million. Money usually pours in during this month as savers look to use their Isa allowance before the tax year ends in April. In March 2016, cash Isa balances rose by £486 million, and by a huge £ 1.4 billion in 2015.

This year savers put £681 million into taxable accounts, including £232 million into fixed- rate bonds and notice accounts and £449 million into easyaccess accounts.

It is the first time the amount in fixed-rate bonds has risen since November 2015.

Rates here have edged up as new banks compete for funds on these taxable accounts to grow their businesses.

But they don’t tend to offer cash Isas. This lack of competition has led to cash Isa rates falling or, at best, standing still.

Last month, Coventry BS cut the rate on its leading easyaccess cash Isa from 1.05 pc to 0.9 pc for new savers, while the NS&I Direct Isa fell from 1 pc to 0.75 pc for all savers. Even where new banks do offer cash Isas, their bonds pay more. With Kent Reliance’s one-year fixed-rate deal you’ll earn 1.45 pc in its bond, but just 0.9 pc in its Isa — a huge 61 pc gap. At Aldermore Bank, you earn 50 pc more with 1.5 pc in the bond, and 1 pc in its Isa. Rachel Springall, financial expert for Moneyfacts, says: ‘ You can earn more in non- Isa accounts. Best deals come from new banks that do not tend to offer Isas.’ Susan Hannums, director at Savings Champion, says: ‘ The gap between ordinary accounts and cash Isas is widening. There is no competition here because big banks, which used to fight for your Isa cash, are not interested in your money.’ Traditionally, Halifax and Santander were among the very top Isa payers. Now they pay as little as 0.05 pc.