Good news for those keen to use cash Isas as savings: rates are finally rising and the gap between ordinary accounts and cash Isas has narrowed so much that there isn’t much between them.
This makes the Cash Isa a necessity for every saver as it can protect your interests from the taxman.
Last week, competition intensified when Aldermore Bank introduced a one-year fixed rate cash Isa at 5 per cent. And Shawbrook raised its rate yesterday to 5.01 percent, quickly followed by OakNorth at 5.02 percent.
Easy access rates also look better with the arrival of new providers offering rates higher than 5 percent.
The rates paid on these accounts are no longer so far behind taxable accounts that they are not worth worrying about.
Tax shelter: Cash Isa rates are finally rising and the gap between them and ordinary accounts has narrowed so much there’s barely a hair’s breadth between them
Now, there are more than four million accounts where savers are at risk of paying taxes on interest, up almost a million in six months due to higher interest rates.
Now basic rate taxpayers are ruining the personal savings allowance of £1,000 on tax-free interest on ordinary accounts. For higher rate payers, it’s £500.
At rates of 5 per cent, you will pay tax if you have more than £20,000 in ordinary accounts as a basic rate taxpayer, or £10,000 for higher rate payers. Your 5 percent is only worth 4 percent if you are one of the first, 3 percent if you are one of the second.
The message is clear: use your £20,000 Isa allowance by April 5 to make your interest tax-free.
So where to start? First of all, don’t go to your current account provider – their rates will be terrible.
Just look at them: Barclays 1.66 per cent, NatWest 1.75 per cent, Halifax 1.45 per cent, Santander 1.7 per cent, Lloyds 1.4 per cent on their easy-access cash Isas. HSBC pays 3.2 per cent, but only with the right current account and if you add to your Isa each year.
The only exception is Virgin Money, which pays 4.76 per cent and an unbeatable fixed rate of 5.25 per cent if you tie up your money for a year.
Big banks charge higher rates, but you’ll have to move your cash within a year.
Halifax pays 4.1 per cent of your Bonus Saver Isa if you make fewer than four withdrawals. But after a year, your money is transferred to the Instant Isa Saver, paying 1.45 per cent.
Other banks and building societies pay much more. Among the best performers were Zopa (5.08 per cent), Marsden Building Society (5.05 per cent) and Charter Savings Bank (5.03 per cent).
On one-year fixed rate accounts, OakNorth’s 5.02 per cent is the maximum with a minimum of £1, or you can charge monthly interest of 4.91 per cent.
Two-year fixed interest rates are lower as the overall level of interest rates is set to fall. If rates fall, you can gain by choosing a longer-term product, such as Zopa (4.67 per cent), Hodge Bank (4.62 per cent) and Furness BS (4.6 per cent).
Paragon Bank launches active account
Paragon Bank has launched a new version of its dual access account. It offers 5.16 percent, making it the best payer for easy-access accounts that limit annual withdrawals.
It just beats Coventry BS Triple Access Saver (Online) Issue 3 with 5.08 per cent. The interest is variable and subject to taxes.
I don’t include accounts that limit the number of times you withdraw your money in my easy-to-access best buy tables. But I keep you informed.
Paragon Double Access allows two withdrawals per year. If you earn more, the rate plummets to 1.5 percent. And you have to leave £1,000 there.
Older versions of the Paragon account, closed to new savers, pay different rates, so switch to the new one if you get a lower rate. Issue 1 pays 4.75 percent and issue 3 pays 5.25 percent.
If you have Coventry’s first or second issue, stick with them for their rate of 5.20 percent and 5.15 percent, respectively.
Check the best cash Isa rates in our savings tables