Money Matters Margaret Dibben

People who sell us savings schemes are a heartless lot, and that includes National Savings & Investments (NS&I). Last year, just before the general election, the Government produced the outstandingly popular NS&I pensioner bonds, which paid higher rates than other savings accounts.

The one-year bond matured in January and millions of pounds were, in a short space of time, looking for a new home. We hoped the Chancellor would replace the one-year bond with another well-paying one. Not only would that help people who need income from their savings but it would also encourage banks to compete with attractive NS&I rates.

Unfortunately he did not. The pressure was off the banks and they have continued to cut savings rates even further this year, despite the fact that base rate remains unchanged.

They are currently more than happy to slash savings rates. Normally in the run-up to the new tax year in April, they compete fiercely to produce the best-paying cash Isa. It is known as the Isa season.

This year is different. Wholesale rates (the interest rates that banks charge each other) have dropped. So at the moment banks can raise the money to fund their mortgages more cheaply on the wholesale market than by paying good rates to us retail customers. This year they are not bothered about cash Isa business.

On our side, savers are now questioning whether it is worth buying cash Isas any more, simply because they are tax free. The prompt is the new personal savings allowance which comes in addition to the standard personal allowance and is the biggest shake-up in savings for a generation.

From 6th April basic rate taxpayers no longer have to pay any tax on the first £1,000 of interest they earn on their savings each year. The limit for higherrate taxpayers is £500 though there is nothing for additional-rate tax payers. The Government reckons 95 per cent of the population will now pay no tax on their savings.

Banks will no longer deduct tax when they pay your interest. People on PAYE will have their tax code adjusted to account for the tax they owe on savings. The self-employed will declare it on their tax returns as usual.

Interest earned on cash Isas does not count towards the personal savings allowance – so is it better to buy a poorly paying tax-free cash Isa or go for a savings account without tax relief because there is no tax to pay on the first £1,000 of interest anyway?

Actually the only people who will be better off avoiding cash Isas are those who can be certain they will never earn more interest than the personal savings allowance and put their money in a ‘Did you hear that? The mournful cry of a hungry chainsaw ... alas, he too has his little ones to feed ... I suppose’ savings account paying more than cash Isas. These are not difficult to find, particularly with the challenger banks and some building societies. Challengers are small new banks set up to compete with the well known high street banks. They give the same investor protection as established banks. Names you might come across include Aldermore Bank, Charter Savings Bank and Shawbrook Bank.

Everyone else needs to think further forward. When interest rates do eventually go up, you will reach your £1,000 tax-free allowance on a smaller amount of savings. Once you have a cash Isa it is tax free for ever.

For all the current interest rates check the website www.savingschampion.co.uk.