Make the most of this year’s ISA allowance

Savers can earn a better return on their savings by investing their cash in a one year fixed rate cash ISA, compared with a one year fixed rate bond - analysis by moneysupermarket.com has found.

The average rate for a one year fixed rate bond is currently 3.04 per cent compared to 2.97 per cent for a one year fixed rate cash ISA. However, with the additional tax-free benefits the cash ISA could earn over £27 extra once basic tax is deducted, a 22 per cent increase over the course of the year, if they invested the maximum allowance of £5,100. Higher rate taxpayers would benefit further, earning over £58 more after tax. Basic rate taxpayers would need a rate of 3.75 per cent in a fixed rate bond, while higher rate taxpayers would need a rate of 5.00 per cent just to gain the same return as a fixed rate ISA after tax has been deducted.

Kevin Mountford, head of banking at moneysupermarket.com, commented:  "ISAs are a great way for savers to make the most of their hard earned cash as they do not have to pay income tax on the interest earned. Our analysis shows that even though one year fixed rate bonds pay a higher rate of interest, the tax benefits of a one year fixed rate cash ISA outweigh the higher interest rate of a one year fixed rate bond.

"Fixed products have been popular for savers looking to generate better returns on their savings against rising living costs and high inflation. With any fixed product it is important that savers are aware of when the rate expires, and ensure they transfer their money to avoid a poor rate of interest on expiration. If savers are looking for more flexibility from their savings, an easy access account may be the best option.

"With four months left to use this year's ISA allowance, savers should monitor the market to ensure they are getting the best deal, and check their ISA allows them to transfer to another product if they find a better rate. Leeds Building Society has recently launched a one year fixed rate cash ISA offering three per cent, and only requires a minimum deposit of £1; so even those with small deposits can ensure they take advantage of the tax benefits offered by a cash ISA."

For more information, visit moneysupermaket.com.