If you had saved the maximum into a cash Isa since they were introduced in April 1999, and each year the rate of interest earned was equivalent to the Bank of England Base rate, you could now have £60,000 in cash individual savings accounts (Isas). Unfortunately, you will struggle to find cash Isa accounts that beat Consumer Prices Index inflation (CPI) at 2.7 per cent.
Although there is little indication that interest rates are going to improve by a great deal anytime soon, there has been a small nudge in the right direction from a smattering of cash Isa providers. In January there were only three, but there are now seven cash Isas paying 2.7 per cent or more tax- free, according to Anna Bowes, director of savingschampion.co.uk. Five of these accounts allow transfers in. However, no cash Isas beat Retail Prices Index inflation (RPI) at 3.3 per cent.
Interest you earn from a savings account is subject to income tax. Depending on your income tax banding, up to 50 per cent of any interest you earn goes straight to the taxman. However, unlike normal savings accounts or investments, interest earned from a cash Isa is completely tax-free.
The higher the rate of tax you pay, the more beneficial a cash Isa will be compared to a normal savings account. The table below shows the rates you'd need to match a cash Isa with a non-Isa savings account.
Gross rate needed from a normal savings account
| Cash Isa gross rate | Basic-rate tax payer (20%) | Higher-rate tax payer (40%) | Additional-rate tax payer (50%) |
|---|---|---|---|
| 1.00% | 1.25% | 1.67% | 2% |
| 1.50% | 1.875% | 2.5% | 3% |
| 2.00% | 2.5% | 3.34% | 4% |
| 2.50% | 3.13% | 4.17% | 5% |
| 3.00% | 3.75% | 5% | 6% |
| 3.50% | 4.38% | 5.83% | 7% |
| 4.00% | 5% | 6.67% | 8% |
| 4.50% | 5.63% | 7.5% | 9% |
Cash Isas that match or beat CPI inflation
| Provider/Account | Term | AER | Transfers in allowed |
|---|---|---|---|
| Coventry BS 60 Day Notice Isa (3) | 60 days notice or loss of interest on withdrawals | 2.80%* | No |
| Earl Shilton BS 90 Days' Notice Cash Isa | 90 days notice or loss of interest on withdrawals | 2.70%** | No |
| Nationwide 4 Year Fixed Rate Isa | 4years | 2.70% | Yes |
| Cheshire BS 4 Year Fixed Rate Isa | 4years | 2.70% | Yes |
| Derbyshire BS 4 Year Fixed Rate Isa | 4years | 2.70% | Yes |
| Dunfermline BS 4 Year Fixed Rate Isa | 4years | 2.70% | Yes |
| Halifax Isa Saver Fixed – 5 years | 5years | 2.70% | Yes |
*Rate includes a bonus of 0.60 per cent for 12 months. **Rate is due to fall to 2.25 per cent from 1 May 2013. Account is only available to locals. | |||
