Cash Isas loose their sparkle: Dismal returns mean you can now earn more with an ordinary savings account
Savers are pulling cash out of Isas at a record pace after rates plummeted.
The dismal returns now paid by cash Isas mean savers can earn more interest with an ordinary savings account — even after tax.
The amount of money deposited into the tax-free accounts has dropped for three months in a row, according to the latest Bank of England figures. Savers withdrew £366 million between March and May.
The dismal returns now paid by cash Isas mean savers can earn more interest with an ordinary savings account – even after tax
Cash Isa savers can deposit up to £20,000 tax-free every year, and this allowance is reset on April 5.
Yet in April this year, savers took out £247 million more than they put in. In April 2019 they added £2.9 billion to their Isa pots.
By comparison, money is still flowing into ordinary savings accounts this year, with an extra £35 billion paid in during the same month.
The average easy-access Isa rate is currently just 0.37 per cent, down from 0.96 per cent a year ago — a huge 62 per cent fall, according to Moneyfacts’ analysis.
Even the top rate available has nosedived from 1.5 per cent to 0.9 per cent. The best one-year fixed-rate cash Isa is 0.7 per cent, less than half the 1.62 per cent you could earn a year ago.
Savers can earn a much higher 1.05 per cent in a taxable account from Allica Bank. Even if you pay 20 per cent tax on your interest you will still end up with 0.84 per cent in interest, which is more than in the cash Isa.
The Government-backed National Savings & Investments’ Direct Saver pays the best taxable easy-access rate of 1 per cent.
If you put your savings into NS&I’s Direct Isa, you’ll earn a lower 0.9 per cent.
The big advantage of a cash Isa is that the interest you earn is automatically tax-free. But that holds little sway now because rock-bottom rates mean more than nine out of ten savers don’t have to pay tax on interest anyway.
Instead, Britain’s 26.9 million basic-rate taxpayers can make use of their personal savings allowance.
This concession from HM Revenue and Customs allows you to earn up to £1,000 in interest from an ordinary savings account each year without paying tax.
Even with a top rate of 1 per cent, a 20 per cent basic-rate taxpayer would need £100,000 in their account before breaching this barrier.
Britain’s 4.2 million higher-rate taxpayers, who pay 40 per cent, get an allowance of £500 a year.
Those who pay additional-rate tax of 45 per cent (46 per cent in Scotland) get nothing at all. Those who do pay tax on savings are typically additional-rate taxpayers or those with a higher-than-average balance in the bank.