No sooner than we announce a new best buy cash Isa it seems another jumps up the our savings rates league table to claim top spot.
Santander has this time seized the limelight in the tax free savings space by launching a new easy-access cash Isa paying 1.85 per cent interest.
Someone able to stash the maximum annual Isa allowance of £20,000 into Santander’s deal could expect a return of £373 after one year.
Watch-out: After the first 12 months, savers’ money will be transferred from the lucrative eIsa into Santander’s Isa Saver account, which currently pays 0.1 per cent.
It supersedes Gatehouse Bank, which earlier this week launched a deal paying 1.75 per cent.
Santander has also launched a market-leading one-year fixed rate Isa paying 3 per cent and table topping two-year deal paying 3.25 per cent.
Savers can get started with as little as £500 and it is also possible to transfer Isas from other providers at any time.
As the easy access account is a new issue of Santander’s eIsa account, existing customers who signed up under previous issues, such as issue 14, which paid 1.5 per cent, will not see their rate increase automatically.
Savers also need to be aware of one major drawback. After the first 12 months, their money will be transferred from the lucrative eIsa into Santander’s Isa Saver account, which currently pays 0.1 per cent.
They will therefore need to revise their options at the end of the first year and transfer their cash to a new provider.
Those prepared to relinquish access to their cash for a year or more in exchange for higher interest may prefer to opt for Santander’s fixed rate cash Isa deals.
Fixed cash Isa rates tend to pay far less than their non-Isa equivalents, however, due to their tax-free status. The second best one-year fixed rate cash Isa deal pays 2.65 per cent compared to the best taxable fixed rate deal which pays 3.4 per cent.
| Type of account (min investment) | Rate (tax-free) | ||||||
|---|---|---|---|---|---|---|---|
| ONE YEAR | |||||||
| Santander (£500+) | 3.00 | ||||||
| Leeds BS (£1,000+) | 2.65 | ||||||
| Secure Trust (£1,000+) | 2.65 | ||||||
| 18 MONTHS | |||||||
| Santander (£500+) | 3.10 | ||||||
| Skipton BS (£10,000+) | 2.75 | ||||||
| TWO YEARS | |||||||
| Santander (£500+) | 3.25 | ||||||
| Hodge Bank (£1,000+) | 3.17 |
However, Santander has closed this gap by launching its 3 per cent one-year cash Isa. Someone depositing £20,000 into this account could secure £608 in interest.
Once again this deal can be opened with just £500. However, unlike the easy-access option, once committed savers cannot withdraw money from this account unless they close it. There is a penalty of 120 days’ interest if you close the account early.
Those wishing to transfer Isas in from other providers will need to do so within 14 days of opening.
Savers preferring to lock away for longer can secure 3.25 per cent interest by fixing for two years with Santander.
Someone depositing £20,000 in this account could earn £1,341 in interest over the two years.
It’s also worth pointing out that Santander also offers a market leading 18 month cash Isa deal paying 3.1 per cent.
Cash Isa or savings account: Which is better?
Savings rates have been heading upwards this year, meaning an increasing number of savers may become liable to pay tax on the interest they are earning.
However, those saving into a cash Isa will shield any interest they earn from the taxman.
Outside of a tax-free Isa, any interest earned in savings accounts will still be tax free up to a certain level. This is due to the personal savings allowance, which was introduced in 2016.
This allowance means basic rate taxpaying savers don’t pay tax on the first £1,000 of interest they earn.
Savers in the higher-rate tax band are afforded protection up to £500, but additional rate taxpayers have no such allowance.
While the tax-free element should be a consideration for those seeking somewhere new to stash their savings, the rates offered on the best cash Isa deals are noticeably less generous than the best non-Isa equivalents.
The best standard easy-access savings deal pays 2.1 per cent – 0.25 percentage points more than Santander’s market-topping cash Isa rate.
After the personal savings allowance, a basic rate taxpayer saving in the 2.1 per cent non-tax free easy-access deal would essentially earn 1.68 per cent interest after tax. That’s 0.17 percentage points less than if it was held in Santander’s cash Isa.
Cash Isas will likely be a better option for higher rate taxpayers, as the effective rate on the best standard easy-access deal is reduced to 1.26 per cent after tax.
For those wanting a one-year fixed account, the best standard savings account pays 3.4 per cent interest compared to the best cash Isa one year rate of 3 per cent: an 0.4 percentage point gap.
After the personal savings allowance, a basic rate taxpayer saving into the best standard one-year deal would earn an effective interest rate of 2.72 per cent after tax – that’s 0.28 percentage points less than the best deal with a tax-free wrapper.
For a higher rate taxpayer their after tax interest would be reduced to effectively 2.04. That’s almost 1 percentage point less than if held with Santander.
