Debate over benefits of tax free accounts as ISA season kicks off

News - Savings

Written by Ray Clancy

Friday, 22 January 2010 09:13

As UK banks and building societies begin to launch their best-buys before the end of the tax year draws opinion is divided over the benefits of tax free accounts.

In the coming weeks savers are set to scramble to use up their tax-free allowance of £3,600, or £5,100 for the over 50s, but experts say they should shop around to get the best deal.

Putting your money into a tax-free account is worth a mere 73p per month, according to research by Moneynet.co.uk. The additional returns on a tax-free ISA compared to a standard savings account for a basic-rate tax payer are equivalent to just £8.72 per year on a £3,600 investment, the financial advice site says.

This figure increases to £12.34 on a £5,100 ISA. And fixed-rate ISAs fare marginally better, but are still only worth £14.76 per year more on a £3,600 investment, and £20.91 on £5,100, the research shows.

‘While I appreciate that the tax free status of your ISA savings is ring fenced and carried forward for future years, at the present time consumers are certainly not going to be falling over themselves for such measly returns on their cash,’ said Andrew Hagger, Moneynet spokesperson.

‘The benefit for high rate taxpayers is slightly more worthwhile, but for those not fortunate enough to earn sufficient to qualify for higher rate tax, they are struggling to supplement their income particularly if they are reliant on their savings nest egg,’ he added.
Research by MoneySavingExpert.com shows the returns offered by the top cash ISAs are often still higher than, or at worst equal to, the returns on the top equivalent taxable accounts, due to the tax breaks. Higher rate taxpayers, in particular, reap the benefits most, even if not by quite the same margin as in previous years, it says.

‘For instance, for deposits under £9,000, the top current easy access cash Isa pays 2.65% while the top easy access taxable account pays 3.3%. A higher rate taxpayer who deposits £3,600 and leaves it in for 12 months would earn £95 interest a year in the Isa and £71 in the taxable account,’ the site points out.

Among the first to announce new products is the The Post Office. It has launched a growth bond which is available immediately, with one, two and three year terms, and rates up to 4.4% AER. Also available now is a fixed rate cash ISA offering a one year term with a rate of 3% tax-free/AER

‘The current environment is tough for savers, but the new Post Office Growth Bond, which offers a guaranteed return at a competitive rate, is ideal for those who do not need immediate access to their savings. With a minimum investment of only £500, these bonds are ideal for all types of savers looking to take advantage of rates of up to 4.4% AER,’ he said.

‘With new ISA limits already available to savers over 50 and coming into play for everyone from 6 April 2010, everyone needs to re-evaluate their savings. Whatever your age, opening a new Fixed Rate Cash ISA is a great way of ensuring you are making the most of your tax-free saving,’ he added.

Aldermore, Britain’s newest bank, has launched a series of best-buy fixed rate ISAs. It has launched a one year bond at 3.05%, a two year at 3.6% and three year at 4%. Those who wish to withdraw money early from the one year bond will suffer a 120 day loss of interest, while the others carry a 180 day penalty. They all have a minimum investment of £3,600 and accept transfers from other providers.