ISA Rates

UK banks are denying investors and savers tax benefits and tarnishing the ISA brand by paying out less on fixed-rate cash ISAs then on similar taxable bonds. Reports show that in some cases you can earn more in a taxed bond than in a tax-free ISA.

In general fixed-rate ISA accounts require the saver to tie up their money for one to five years in return for a fixed-rate of interest. ISAs attract customers as they are advertised as tax free, making people assume they are getting a good deal. However some major banks and building societies are pocketing the tax benefits and providing a sub-standard rate of interest.

Lloyds TSB is one of the worst case examples. Their fixed-rate ISA pays 2 per cent interest but 2.2% after tax on its one-year taxable bond.

On longer-term money, where savers tie up their cash for longer periods of time, the gap between ISAs and taxable bonds widen. Halifax pay out 4.1% on a taxable, fixed-rate bond, but only 3.5% on its fixed-rate, tax-free ISA.

Chief executive of the TaxPayer's Alliance, Matthew Elliot commented saying that 'ISAs are a good way to encouraging saving, but they only work if savers benefit from the tax-free benefits. It would appear some banks are just pocketing the tax benefits and using the ISA's brand image to make people think they are getting a good deal'.