Record start to tax year for cash ISAs and NS&I marks second month of outflows

Written by Laura Suter, head of personal finance at AJ Bell

The cost of living and high mortgage costs took a bite out of people’s ability to save in July, as the overall amount the nation added to savings accounts dropped.

Many people are having to dip into their savings to pay bills or are using the money to overpay on mortgages ahead of their re-mortgage. Some will have also used savings this summer to go on holiday or spend on days out. All that meant that in July just £300m was saved in cash ISAS, savings accounts and NS&I accounts, compared to £3.6bn in June. 

As more people realise the taxman could be coming for their savings interest, money has been funnelled into ISAS where interest and investment growth are tax free. Savers put more than £3bn into ISAs in July – the highest inflows for July since 2014. In the first three months of this tax year savers have put more than £9bn of money in cash ISAs – the largest inflows for that period since ISAs were launched in 1999 (see table).

The increase in interest rates means that lots more people are going to breach their tax-free Personal Savings Allowance, and will pay income tax on their savings interest. Thankfully a higher level of press attention on the issue means that many savers are being alerted before the taxman comes calling, and are moving their money into cash ISAs to protect it from tax. Everyone can put up to £20,000 into an ISA each tax year, where the interest won’t be subject to any tax. 

It’s no surprise that NS&I has today increased the rates on its fixed-rate accounts, as the figures show it has seen £300m of outflows in the past two months. The Government-backed savings provider has been continually hiking the rates on its accounts and the prize draw on Premium Bonds to try to draw savers’ money in. 

But in the face of higher interest rates elsewhere, savers are voting with their feet and moving to the highest paying account. The draw of Premium Bonds also dwindles when you’re giving up high guaranteed savings rates elsewhere. We will doubtless see more rate increases from NS&I as it tries to compete with challenger banks to meet its funding target for the year.

Fixed rate accounts continued to be popular at the expense of easy-access accounts, with £10.2bn of money withdrawn from the latter and £10.1bn put into fixed rate accounts. As we near peak interest rates many savers are choosing to lock in high rates with money they know they won’t need in the next year or two. But anyone tying up money needs to be sure they won’t need to get their hands on it in the meantime, as many accounts have stringent exit policies that block you from accessing your money during the fixed term.