- A non-ISA 1yr 5.15% fixed-rate account with a £20K balance generates net return of £818 for higher-rate taxpayer
- £20K held in ISA would require an equivalent rate of 4.09% to generate the same return
- Over 2.3m adult fixed-rate savings accounts with balances of £20k+ earning 2.5% or more – sufficient to breach higher-rate taxpayer Personal Savings Allowance
Over two million fixed-rate savings accounts containing balances of over £20,000 could generate higher returns by switching a portion of their deposit into ISAs on maturity, even if the ISA rate is lower.
Paragon Bank analysis of data from CACI shows there were 2.3 million fixed-rate non-ISA adult savings accounts earning 2.5% interest in May, containing £20,000 or above. Approximately 70% of fixed-rate non-ISA savings accounts are due to mature over the next 12 months, the majority of which are held in one-year fixed-rate accounts.
A non-ISA account with a £20,000 balance earning 2.5% would generate interest of £500, resulting in any interest earned on top of that incurring income tax at 40% for higher-rate taxpayers.
Even though rates offered on maturity on non-ISA fixed-rate accounts may be higher than those available through cash ISAs, the tax charge often means that the tax-free ISA delivers better returns for higher-rate taxpayers with large balances.
For example, £20,000 in a one-year fixed-rate savings account earning 5.15% will earn £1,030 in interest. As a higher-rate taxpayer, the saver will pay £212 of that in tax, leaving a net return of £818.
To achieve the same net return with a cash ISA, the saver would need to find an equivalent rate of 4.09%. Therefore, any ISA account offering a rate above 4.09% would deliver a better return.
By value, CACI’s data shows that £151.9 billion is held in fixed-rate adult non-ISA accounts with balances of over £20,000 and earning more than 2.5% in interest.
Derek Sprawling, Paragon Bank Managing Director of Savings, said:
“Fixed-rate savers can be tempted by the better rates on offer on non-ISA accounts on maturity, but for those higher-rate taxpayers, an ISA variant can deliver a more favourable return. Ensuring you utilise your full £20,000 ISA allowance is sensible financial management for this cohort of saver.
“The driver is tax. As savings rates and balances have risen since the onset of the pandemic, more savers are paying tax on their savings interest. By switching to an ISA, not only can higher-rate taxpayers generally generate better returns, the cash held within the ISA wrapper is also free from tax in perpetuity.”
