Cash ISA savings are at record levels – but rates are disappointing 

Savers who put their money into tax-free Isas are being short-changed with lower interest rates than those that are available on ordinary savings accounts.

Cash Isas and ordinary savings accounts are broadly similar, except all interest earned in the former is shielded from tax. 

However, the difference in interest rates paid between these two types of account has almost trebled in six months.

The best fixed-rate bond now pays 0.85 percentage points more than the top fixed-rate cash Isa. 

This compares to a 0.3 point difference in January. However, as interest rates continue to rise, a growing number of savers could be better off sticking with a Cash Isa, even if it means accepting a slightly lower rate.

That is because interest earned in non-Isa accounts is taxable, once you breach your personal savings allowance.

Basic-rate taxpayers get a £1,000 personal savings allowance each year, which is the amount you can earn in interest in a taxable account before you pay tax.

For higher-rate taxpayers, this is £500 a year, while additional rate taxpayers have no allowance. 

Interest is taxed at your income tax rate — in other words 20, 40 and 45 per cent for basic, higher and additional rate taxpayers respectively. While rates were low, very few savers were at risk of breaching their allowance and being hit with a tax bill.

At the start of last year, the top one-year bond from Investec stood at just 1.36 per cent. 

Then a basic rate taxpayer could have around £73,000 in the account without busting their allowance while a higher rate taxpayer could have £36,700.

Now, with the top rate at 5.85 per cent on a one-year bond from Close Brothers Savings, this has dropped to a much more meagre £17,100 and £8,550 respectively.

If you had £10,000 in a fixed-rate bond, you would earn £585 interest over the year with the top bond but a lower £505 with an equivalent Isa. 

But if you have to pay 20 per cent tax on your interest, the £585 will end up at a lower £468 interest. After 40 per cent goes to the taxman, you will end up with just £351 in the non-Isa bond.

As interest rates rise, cash Isas are growing in popularity. But not all new banks offer Cash Isas, so competition is less fierce. SmartSave, Allica Bank and Atom Bank don’t offer Cash Isas. 

And those that do tend to compete more avidly on fixed-rate bonds. With Charter Savings you earn 5.67 per cent in a taxable bond before tax but only 4.8 per cent in its one-year Isa.

sy.morris@dailymail.co.uk