Best buy savings rates have continued to increase over the past month, and there should be more to come, certainly in the variable rate arena, as the Bank of England hiked the base rate again this week – from 5% to 5.25%. But there is a definite feeling that things are slowing down - in the fixed rate bond market in any case. In fact, the top shorter term bond rates on offer have actually fallen from a higher level earlier in the month. And the longer-term bonds continue to pay less than the shorter term, indicating that the markets expect the base rate to peak shortly, then start to fall again over the coming years.
But the good news is that fixed term ISA rates are still rising, and the top rates are the highest we’ve seen in over a decade. And because bond rate increases have slowed, the gap between the top bond rates and the equivalent top fixed term ISA rates is at its narrowest for years. This is particularly good news because savers are using up their Personal Savings Allowance (PSA) with far lower deposits and therefore cash ISAs are important and valuable once again.
A year ago, the top 1-year bond was paying 2.83% gross/AER so the Personal Savings Allowance would have been breached with a deposit of £35,336 – already far less than when the PSA was introduced in April 2016. At that time, the best 1-year bond available was paying 1.91% so you’d need a deposit of £52,356 to use up the basic rate taxpayer PSA of £1,000.
Even more extraordinary is that at its lowest point, in April 2021, the top 1-year bond was paying just 0.58% - so you would only have breached the PSA with a deposit of £172,414. How things have changed.
With the top 1-year bond rates currently paying as much as 6.05% AER, a basic rate taxpayer would need just £16,529 in a bond before they need to start paying tax. For higher rate taxpayers, as the allowance is just £500, it would be breached with just £8,265.
According to Shawbrook Bank and data firm CACI, around 3.3 million savings accounts earned more than £1,000 in interest in the tax year 2022/23, up from around 257,000 the year before, when savings rates were just starting to rise. And this means that the amount of tax that the government has collected from savers has more than doubled from £1.2 billion to £3.4 billion over that period and according to the Mail on Sunday, savers are expected to owe £6.6 billion on their savings interest for the current tax year.
So, with smaller and smaller deposits using up the PSA, savers are turning back to the cash ISA to help shelter some of their savings from the taxman. And with ISA rates rising strongly, especially recently, it’s not a tough decision to use up your ISA allowance if you’ve not used it already. A year ago, the decision wasn’t quite so simple as the gap between the top ISA rates and the equivalent bond rates was much wider. Back in July last year, the top paying 1-year bond was 29% higher than the top 1-year ISA - so the top bond was paying 2.83% whilst the top ISA was 2.20%. That meant that a basic rate taxpayer would have still earned more in the bond rather than the ISA, even if 20% tax was deducted from the bond.
Today though that gap has narrowed considerably - so the top bond is paying 6.05% (which is 4.84% net after the deduction of basic rate tax) whilst the top ISA is paying 5.71% tax free. A much better rate than the net amount that could be earned on the bond after the deduction of tax.
Use it or lose it
Unlike contributing into a pension, the ISA allowance is a use it or lose it one. So, if you miss the ISA deadline of the 5th April, you cannot go back and utilise it at a later date. It therefore makes sense to open a new ISA as soon as possible each tax year to make sure you don’t forget. This will also see you earning tax free interest for the whole tax year, rather than just at the very end.
Of course, it’s not just about using your current allowance either. With rates at a far more competitive levels today, it makes sense to review old ISAs too and transfer them if you could be earning more tax-free interest elsewhere. But remember the golden and very important rule of moving your ISA. If you want to switch, you must not close your existing ISA as that will likely mean losing the tax-free benefit.
Instead, you need to approach the new provider you wish to move to and complete the cash ISA application and transfer forms. They will then contact your existing provider and arrange the transfer for you.
Finding the most suitable cash ISA for you is the key to success and this is where we can help. Check out our independent best buy tables for the top rates on offer for both your new subscription and for any old ISAs you are looking to transfer.
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