Banks accused of pinching savers’ ISA tax breaks

Al Rayan Bank, Aldermore, Hodge Bank, Metro Bank, Post Office, Saffron Building Society and Shawbrook Bank are among those whose ISA deals’ rates are far lower than their fixed rates, according to research carried out by Savings Champion.

The consumer organisation found that the Post Office’s one-year growth bond (issue 38) is at 1.4 per cent, while the one-year fixed rate ISA (issue 24) is at 1 per cent — meaning that, in effect, the one-year ISA pays 29 per cent less interest than the bond.

One of the reasons fixed-rate ISAs pay less than fixed-term bonds is that there are different rules over allowing investors to access the cash.

With a bond, the bank does not have to allow access so it can offer a higher rate because it does not need to hold as much cash on its books. With an Isa, banks are obliged to provide some access to savers, so they need cash for liquidity.

However, the difference in rates has led to accusations that banks are essentially pinching savers’ ISA tax breaks — a charge given extra credibility because the 20 per cent difference is the same as basic-rate taxpayers get on an ISA. With an ISA, you do not pay tax on interest earned, but with a bond you do.

Since the introduction of the personal savings allowance that gives basic-rate taxpayers £1,000 of interest free of tax, and higher-rate payers £500, this has been less of an issue. But it does mean savers can lose their annual ISA allowance of £20,000 if they don’t use it.

Anna Bowes, co-founder of Savings Champion, said: “The result of the personal savings allowance was that Isas seemed to fall out of favour with savers and providers alike — plus many of the challenger banks don’t yet offer cash Isas so they set the price of the fixed-rate bonds.”

However, she pointed out that it was better to chase the best deals rather than worry about the rates the same provider offered, for example, the best one-year bond and Isa are both from Shawbrook, even though the bond essentially pays 20 per cent less interest.