Banks pocketing savers' ISA tax bonus

Posted on: 18 January 2010 by Mark O'haire

Banks are depriving savers of tax benefits and harming the ISA brand by paying less on fixed-rate cash ISAs than on similar taxable bonds.

Banks pocketing savers' ISA tax bonusIn some cases, you can earn more in a taxed bond, even after paying tax, than in a tax-free ISA.

Banks are, in effect, pocketing part of the tax perk that should go to you.

On fixed-rate accounts, savers agree to tie their money up for typically one or two years in return for a fixed-rate of interest.

The rate is higher than that paid on easy-access accounts, where you have ready access to your cash.

But the top one-year, fixed-rate bond currently pays 3.25% before tax compared with the 3% paid on fixed-rate cash ISA.

One of the worst examples is Lloyds TSB, which pays 2% on a one-year, fixed-rate ISA, but 2.2% after tax (2.75% before) on its taxable one-year bond.

On longer-term money, where banks and building societies are competing fiercely, the gap is wider.

Halifax and C&G, both part of taxpayer-subsidised Lloyds Banking Group, pay 4.1% on taxable two-year, fixed-rate bonds, but only 3.5% on fixed-rate ISAs. The 4.1% is worth 3.28% after tax to a basic-rate taxpayer. So a basic-rate taxpayer who picks an ISA is 0.22% better off - or £2.20 a year on each £1,000.

If Halifax and C&G paid the same on cash ISAs as on other fixed bonds, savers would make an extra £12 interest on each £ 1,000 they put into a two-year bond.

Last week, Santander - the new name for both Abbey and Bradford & Bingley - launched a two-year, fixed-rate ISA at an attractive 3.5%. It has a similar two-year, fixed-rate bond also paying 3.5% for smaller sums. But at £25,000, the taxed bond rate rises to 4.1%, 17% higher than it pays on a similar sum to its ISA savers.

Matthew Elliott, chief executive of the TaxPayers' Alliance, says: 'ISAs are a really good way of encouraging saving, but they will only work if people get the promised tax benefit for putting their money in the accounts.

'It seems that some banks are simply pocketing the tax benefit and relying on the ISA name to make people think it is a good deal.

'This kind of sharp practice threatens to harm the ISA brand, as well as depriving savers of tax benefits that should be theirs.'

Kevin Mountford, head of savings at, adds: 'Banks need to wake up to the fact they need to encourage savers.

'The increase in the amount you can put into a cash ISA each year is good news. Now the industry has a chance to offer the same deal to ISA savers as to others. They are the same product, so there is no reason why they should not be the same deal.'

A spokesman for Lloyds says: 'Our fixed-rate bonds are not priced in competition with ISAs, but with other fixed-rate bonds on the market.' 

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