Isas are back – here are the best

Interest rates on Isas are at a 14-year high but it could the last chance saloon, warns Adam Williams

Savers could have just days left to open the best-paying fixedrate accounts, amid fears the top interest rates on the market will soon disappear.

Cash savers are enjoying their highest returns for years with interest rates rising substantially since the Bank of England started to increase Bank Rate in December 2021. Returns were boosted even further in the wake of the mini-budget last September. The average easy-access cash Isa rate is now 2.01pc, according to analyst Moneyfacts. In February the figure was 1.85pc, a year ago the average was 0.3pc. Isa savers are now enjoying the highest rates since 2009.

Banks have been much quicker to pass on higher interest rates to mortgage borrowers than to savers, although the rates homeowners are charged have levelled off and then started to fall in recent weeks. Experts warned that savings rates were beginning to follow suit.

Paragon Bank, Principality Building Society and Yorkshire Building Society all offer easy-access cash Isa rates of 3.1pc, the best in the market. However Rachel Springall, of Moneyfacts, said while rates were still much higher than in recent years, competition had started to subside.

Anna Bowes of Savings Champion, another analyst, said she feared that fixed rates had already passed their high point.

The average one-year fixed-rate Isa increased by 0.15 percentage points between February and March, rising from 3.41pc to 3.56pc. This increase is much slower than the 0.69 percentage point rise between October and November, and the 0.33 percentage point rise between November and December. Those locking in for 12 months or more can benefit from much higher returns, but could miss out if rates defy expectations and keep rising. The best-buy one-year Isa is offered by Virgin Money at 4.25pc, Shawbrook Bank tops the two-year tables with a rate of 4.16pc while Close Brothers Savings has the best three-year deal at 4.2pc.

Ms Bowes said: “It looks like the peak of the fixed-term market has passed.

“Although the good news for Isa savers is that actually fixed Isa rates have been more resilient than fixed-term non-isa bond rates of late and the gap between the two is now at its lowest for years.”

She added that many savers had previously held off opening fixed-rate accounts with the belief that interest rates

would rise further. However, she said that view should be revisited.

Rising rates have also made saving in a tax-efficient manner more important than ever.

As interest rates have risen, so has the likelihood of cash savers breaching the personal savings allowance. Basicrate taxpayers can earn £1,000 a year in savings interest without paying income tax and higher-rate payers can earn £500 tax-free. Top-rate, 45pc, payers do not receive any personal savings allowance at all and must pay income tax on all interest held outside of Isas.

With interest rates being low for years, few savers have been in danger of paying tax. But with rates now spiking even modest savings balances can quickly become liable.

In December 2021, the best easy-access account on the market paid 0.71pc, meaning a deposit of £140,845 would have been needed to breach the personal savings allowance for a basicrate taxpayer – assuming no other savings accounts were held. Today, said Ms Bowes, the best easy-access account pays 3.1pc, so savings of just £32,259 will breach the allowance for basic-rate taxpayers.

Ms Springall said competition in the best buy tables had subsided in recent weeks and recommended savers consider newer banks, which have no high-street branches but typically offered better rates than the wellknown banks because they were more desperate to build up deposits.

However, she warned that while these accounts may offer better returns, further increases to the Bank Rate would not necessarily be passed directly on in full to savers.

She said: “Bank Rate is not as intrinsically linked to savings accounts like it was many years ago, but there are savings providers out there boosting their accounts away from some of the biggest high street brands.

“So-called challenger banks typically increase their rates to entice deposits to fund their future lending, and building societies traditionally offer a competitive return to their loyal customers.”

The demise of Silicon Valley Bank could also bring a new wave of caution. Emma Wall, of stockbroker Hargreaves Lansdown, said the American bank’s collapse could have repercussions for savers in Britain.

She said: “The market now considers a Bank of England rate rise later this month only a 60pc certainty, down from 90pc last week. The outlook for interest rates is still broadly positive for savers, but it may be worth locking in these multi-month highs ahead of the new tax year.”