Savers looking to protect the interest they earn from the taxman are seeing wave after wave of new best buy cash Isa rates hit the market.
Newcastle Building Society is the latest provider to launch market leading rates. Its new one-year fixed rate cash Isa pays 3.6 per cent, whilst its two-year fix pays 4.1 per cent.
The next best one-year deal currently pays 3.2 per cent whilst the next best two-year deal pays 3.4 per cent.
Tax free: Those saving into a cash Isa will shield any interest they earn from the taxman
At present neither a three-year or five-year fixed rate cash Isa even matches Newcastle’s one-year deal.
Someone stashing £20,000 into Newcastle’s one year fix will earn £720 in interest after one year, or £1,673 after two years if opting for the two-year deal.
Savers can apply online or in branch and can open an account with £500.
The rate is fixed to a specific date rather than exactly one year from opening the account.
In the case of the one-year deal the rate is fixed until 3 November 2023 and in the case of the two-year account its fixed until 4 November 2024.
Both will allow savers to withdraw funds if they need to, but doing so will come at a cost.
Those withdrawing from the one-year deal will lose 90 days worth of interest. Withdrawing from the two-year will mean losing 120 days of earned interest.
Savers who may want to sign up for the first time or transfer their existing cash Isa to one of Newcastle’s deals will need to act fast.
Smaller savings providers have smaller funding targets they wish to achieve. Once enough cash has come in, they will pull the deal.
Newcastle did this with its best one-year fixed bond paying 4.1 per cent, having only launched it a day earlier.
How high will cash Isa rates go?
All savings rates are rising fast at present and cash Isas are no exception.
The average easy-access cash Isa rate has quadrupled since the start of the year, according to Moneyfacts, rising from 0.27 per cent to 1.05 per cent.
The average one-year deal has risen on a similar trajectory during that time, increasing from 0.59 per cent to 2.3 per cent.
But competition at the top of our best-buy savings rate tables has been even steeper.
This time exactly four weeks ago the best one year cash Isa deal paid 2.5 per cent.
This means that in less than one month the best deal has increased by 1.1 percentage points – far above the Bank of England’s recent base rate hike of 0.5 percentage points.
The freefall in the value of sterling against the dollar coupled with inflation is leading many to predict that the base rate will continue to rise.
There has been talk this week that the base rate could even reach as high as 6 per cent next year.
Andrew Hagger, personal finance expert at MoneyComms believes that if things continue as they are, we can expect to see further cash Isa rate rises.
He said: ‘It’s difficult to know how long the current economic turmoil will last, but I wouldn’t be surprised to see easy access cash Isa rates approaching 2.2 per cent or 2.3 per cent and a one-year fix at around 4 per cent by the end of this year.’
Should you use a cash Isa for your savings?
Whilst Isa rates are rising, they continue to pay less than the non-Isa equivalent deals on the market.
The best standard one-year fixed bond now pays 3.91 per cent, whilst the best two-year is paying 4.33 per cent.
The difference between rates can complicate things for savers weighing up a cash Isa.
There is also added fact that we all have a personal savings allowance – with the exception of additional rate taxpayers earning £150,000 or more.
This means that outside of a tax-free Isa, interest earned in savings accounts will still be tax free up to a certain level.
I think cash Isas will become far more popular all of a sudden as the spike in savings rates will see many more people risk exceeding their annual personal savings allowance
Andrew Hagger, MoneyComms
Basic rate taxpaying savers don’t pay tax on the first £1,000 of interest they earn. Savers in the higher-rate tax band are afforded protection up to £500.
Whether a cash Isa is worthwhile will therefore largely depend on how much someone has in savings and what tax bracket they are in.
For example, someone transferring £10,000 into the best (non-Isa) one-year deal would earn £390 in interest – which is below the annual allowance for both a higher rate and standard rate taxpayer. In this scenario using a cash Isa makes no sense.
However someone transferring £30,000 into the best (non-Isa) one-year deal may end up losing out overall.
Someone stashing £30,000 in the 3.9 per cent rate will earn £1,170 in interest. For a higher rate taxpayer that will mean earning net interest of £902 after tax and their personal allowance is taken into account.
Someone stashing £30,000 in Newcastle’s 3.6 per cent cash Isa deal for one year will earn £1,080 in interest overall – £178 more than the non-Isa equivalent.
Hagger says: ‘I think cash Isas will become far more popular all of a sudden as the spike in savings rates will see many more people risk exceeding their annual personal savings allowance.
‘An Isa will enable them to shelter some extra cash from the tax man.
‘If you’ve got a standard easy-access account for your emergency savings then I think a one-year fixed rate Isa is a decent option right now.’
Worth it? Whether a cash Isa is a good idea will largely depend on how much someone has in savings and what tax bracket they are in
Anna Bowes, co-founder of Savings Champion adds: ‘With savings rates across the board rising, savers will be fully utilising their personal savings allowance with a far lower deposit than in recent years.
‘But the good news for those that are now breaching their personal savings allowance, is that best buy Isa rates have recovered somewhat and therefore many are paying a better tax free rate, than the rate on an equivalent fixed rates bond, or easy-access account once tax has been deducted.
For example, the best one-year bond is with Oxbury and is paying 3.91 per cent. If you deduct 20 per cent tax, the rate falls to 3.13 per cent – less than the best one year cash Isa.
‘Similarly, the best easy-access account is paying 2.1 per cent which is 1.68 per cent after the deduction on basic rate tax, while the best easy access Isa, the Triple Access Isa from Paragon Bank is paying a tax free rate of 1.9 per cent. So Isas are becoming more relevant again.’
THIS IS MONEY’S FIVE OF THE BEST CURRENT ACCOUNTS
Chase Bank’s will pay £1% cashback on spending for the first 12 months. Customers also get access to an easy-access linked savings account paying 1.5% on balances up to £250,000. The account is completely free to set up and is entirely app based. Also no charges when using the card abroad.
The Club Lloyds account offers £150 free cash when you switch. It also pays 0.6 per cent on balances up to £4,000, and 1.5 per cent on £4,000 – £5,000. Choose a reward each year from 6 cinema tickets, an annual magazine subscription, 12 digital movie rentals. There is a £2 monthly account fee to pay.
Natwest’s Everyday bank account pays £175 when you switch. You just need to deposit £1,250 in the account before 16 December and login to mobile banking.
First Direct will give newcomers £175 when they switch their account. It also offers a £250 interest-free overdraft. Customers must pay in at least £1,000 within three months of opening the account.
Nationwide’s FlexDirect account comes with up to £125 cash incentive for new and existing customers. Plus 5% interest on up to £1,500 – the highest interest rate on any current account – if you pay in at least £1,000 each month, plus a fee-free overdraft. Both the latter perks last for a year.