Cash Isa rates continue to edge higher with Paragon Bank boosting the rate on three savings deals making them all best buys, including a one-year fixed rate account.
With the end of the current tax year fast approaching, some savers may be on a last minute lookout for a cash Isa deal offering better returns.
Paragon Bank’s one-year fixed rate cash Isa has risen from 1.2 per cent to 1.37 per cent, beating the next best deal by 0.02 per cent.
Piggy power! Paragon has upped its one, two and three year fixed rate cash Isa deals – all three are now market leading
Its two-year and three-year cash Isa deals also edged higher, with its market-leading rates now paying 1.65 per cent and 1.7 per cent respectively.
Savers will likely notice these are significantly better rates than what was on offer only a few months ago.
Cash Isa rates have markedly improved since the Bank of England began raising the base rate.
Prior to the first base rate rise in December, the best paying one-year deal paid 0.93 per cent, whilst the best two-year deal paid 1.2 per cent.
Easy-access cash Isas have seen less movement at the top since the base rate changes.
Prior to the base rate rise in December the best deal paid 0.67 per cent. Currently Shawbrook Bank pay 0.85 per cent.
Should savers pull the Isa trigger?
The current tax year runs until 5 April, meaning savers will have to act quickly to utilise their £20,000 annual Isa allowance – but it is likely many have left it until the last minute to see how high rates went.
Those saving into a cash Isa will shield any interest they earn from being taxed. Although it’s worth pointing out they won’t be shielding it from inflation, which is now sitting at 6.2 per cent.
However, without a cash Isa, any interest earned will still be tax free up to a certain level, due to the Personal Savings Allowance.
This allowance means basic rate taxpaying savers won’t need to pay tax on the first £1,000 of interest they earn.
Higher rate taxpaying savers are afforded protection up to £500. However, additional rate taxpayers have no such allowance.
Given this and the low savings rates at present, it means the average saver will need have to built up a considerable savings pot to see any benefit from using a cash Isa.
For example, even a basic rate taxpayer taking full advantage of Aldermore Bank’s Double Access Saver paying 0.95 per cent would need to have almost £105,000 stashed away to breach their £1,000 allowance in a given tax year.
A higher rate tax pay would need to have almost £52,500 stashed in the account to breach their £500 allowance.
A cash Isa is likely to make most sense to an additional rate taxpayer, or anyone sitting on a considerable sum of money.
It is also worth pointing out that rates could rise in the future, meaning having that Isa wrapper could be important in coming years – and they are less likely to be scrapped, given how long they have been around, compared to the PSA.
| Type of account (min investment) | 0% tax | 20% tax | 40% tax | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| ONE YEAR | ||||||||||||
| Al Rayan Bank (£5,000+) (3) | 1.85 | 1.48 | 1.11 | |||||||||
| Atom Bank (£50+) | 1.75 | 1.40 | 1.05 | |||||||||
| Secure Trust (£1.000+) | 1.75 | 1.40 | 1.05 | |||||||||
| TWO YEARS | ||||||||||||
| Al Rayan Bank (£5,000+) (3) | 2.10 | 1.68 | 1.26 | |||||||||
| Atom Bank (£50+) | 2.10 | 1.68 | 1.26 | |||||||||
| THREE YEARS | ||||||||||||
| Smartsave Bank (£10,000+) | 2.16 | 1.73 | 1.30 |
Rates are also typically far superior in the non-Isa market.
For example, the best standard one-year fixed rate deal, offered currently by Al Rayan Bank, pays 1.85 per cent.
Even a basic rate taxpayer exceeding their personal savings allowance will earn 1.48 per cent after tax.
This means they would still do better, even after tax by opting for the market leading non-Isa account.
The difference between easy-access cash Isa deals and their non-Isa equivalents is less pronounced, but still enough to bring into question the advantage of using a tax free savings account.
The best paying easy access deal, offered by Zopa Bank pays 1 per cent – 0.15 per cent more than the best cash Isa deal.
Savvy savers could do even better by setting up a current account with Chase Bank, which is offering a linked savings account paying 1.5 per cent on balances up to £250,000 (although, only £85,000 is protected by the Financial Services Compensation Scheme).
Earning 1.5 per cent would mean that even when exceeding the personal savings allowance, a basic rate saver will still earn 1.2 per cent after tax whilst a higher rate taxpayer would earn 0.9 per cent after tax.
In both scenarios, even after tax, the best easy-access Isa could still be outperformed by Chase’s non-tax free account.
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