Cash Isa rates on the up as the average notice deal rises from its record lows

Long suffering cash Isa savers are beginning to see signs of recovery with rates continuing to play catch up with the rest of the savings market.

All average Isa rates have now moved away from record lows after the average Isa notice account rose to 0.37 per cent, according to Moneyfacts, the first rise since September 2020.

Average easy-access and fixed rate Isas also rose too. The typical easy-access Isa currently pays 0.26 per cent and average one year fix 0.56 per cent.

The number of available Isa savings deals on the market improved for the seventh consecutive month to 382 deals – the highest seen since March 2020 when there were 417 deals.

The competition is helping to keep rates edging upwards. 

Yesterday United Trust Bank upped its rates to match Secure Trust Bank’s three and five year fixed Isa rates paying 1.35 per cent and 1.65 per cent respectively – both becoming market leaders on This is Money’s independent best buy savings tables. 

James Blower, founder of the Savings Guru said: ‘There’s definitely been more competition at the top of the Isa market in the past few weeks.

‘The main reason for it is that the more established challenger banks have switched their fundraising over to Isas because it’s been cheaper, there’s less competition and it has been more stable.

‘August and early September, were particularly volatile in the fixed rate bonds market with some providers changing rates three or four times in a week.’

Cash Isas, enable savers to stash away up to £20,000 each tax year into these accounts and earn tax-free interest.

However, with rates currently so low many savers are unlikely to need the tax protection due to the protection already afforded to savers via the personal savings allowance.

This gives basic rate taxpayers £1,000 of tax-free interest each year, whilst higher rate taxpayers still benefit from a £500 tax-free allowance – although additional rate taxpayers have no allowance.  

Furthermore, the rates on offer in the standard fixed rate savings space are currently far superior to what you can achieve via a cash Isa deal.

For example, the best paying one year fixed rate deal pays 1.35 per cent compared to the best one year Isa fix paying 0.93 per cent. 

The gap between Isa and non-Isa has been exacerbated in recent months by competition among challenger banks such as Tandem and Zopa bank fighting for cash in the fixed rate bond market.

But, according to Blower, we should start to see the ‘slow’ Isa recovery begin to close the gap on the rest of the savings market.

‘The gap has been closing in recent weeks and I think it will continue to do so,’ said Blower.

‘We are seeing more increases at the top of the Isa best buys than fixed rate bonds and that trend is likely to continue because fixed Isas are still good value compared to their fixed rate bond equivalents.’ 

This will come as welcome news to cash Isa savers who despite the record low rates, have not been necessarily abandoning their current deals.

The cash Isa market has increased by 0.6 per cent over the past year and is now worth £292billion, according to CACI data which covers around 86 per cent of the market by value.

Should you use a cash Isa?

With savings deals paying so little at present, the interest rate will likely be far more important to the majority of savers than the tax free wrapper.

However, for those looking to retain access to their cash via an easy-access deal or notice account, then a cash Isa product might make sense – especially if they have built up a big pot over the years. 

Shawbrook Banks’s easy-access cash Isa 18 currently pays 0.67 per cent, allowing you to stash away up to £250,000.

Shawbrook’s standard easy access product is also the current market leader paying 0.67 per cent meaning savers won’t gain any advantage by keeping their money out of its equivalent Isa deal.

For a higher rate taxpaying saver to breach their tax free allowance they would need to deposit roughly £75,000 or more into Shawbrook’s standard easy-access deal. 

‘More than 95 per cent of savers won’t earn enough interest to go above their personal savings allowance so my advice would usually be to take the best rate going,’ said Blower.

‘But if it’s equal or a better rate via an Isa deal then go for Isa and get the tax wrapper.

‘There’s not many types of savers better off in Isas – those include additional rate taxpayers, those with savings which will take them over the personal savings allowance and those saving in special Isas like a Lisa for home buyers or a Jisa for children.

‘Otherwise, the vast majority of savers will be better off taking the higher rates available on ordinary savings and getting the higher return.’