Are British banks pocketing your tax relief on ISAs?
Baroness Stowell certainly thinks so. She says that some scurrilous banks are actually offering lower investment interest rates on their ISA products than some of their own fixed-rate savings products. This means that, although ISAs should, theoretically, always be the first place to put your hard earned beans, questionable policy by banks could mean this is not the case.
Of course, the banks can’t actually take your tax relief, but the depression of ISA rates is an easy way for them to make a fast buck- they are hoping you are too dense to realise that getting the same amount of interest on a taxable (with 20% deducted at source, and a potential further 20% liability) account and a tax-free account would make the tax-free one a seriously bum deal.
The Baroness is now calling on the Treasury to put pressure on banks to ensure they offer customers the interest rates she believes they are due. She said: “Cash ISAs are a great incentive for us all to save. We benefit, and so do the banks: last year 15 million of us held £172bn in cash ISAs. But only customers, not banks, are supposed to benefit from the ISA tax relief. The assumption we have to make is that some of the banks are taking advantage of people who are doing the right thing.”
But it is not all banks who are being naughty boys. Lloyds TSB cash ISAs, for example, are covered by a Cash ISA commitment, which promises that on the day you open a Cash ISA, the rate you get will match or beat that which is available on the equivalent standard savings account. Smashing.
However, taxpayer owned Northern Rock tells a different story. The Northern Rock three-year E-Bond pays 3.70% AER, while the bank’s three-year fixed-rate E-Isa pays 3.50% AER. Likewise, Northern Rock’s E-Saver (Issue 5) account pays 3.01% AER, at the same time as its instant access E-Isa pays just 2.80% AER, according to our friends over at Which! Not particularly smashing. Or Nicey.
Paul Davies, whose job title is ‘expert’ over at Which! says: “In the past couple of years, particularly while interest rates have been at an all-time low, we've seen the quality of some Cash ISA deals decline in comparison with the market’s standard savings accounts... it’s crucial to compare the rate you'll earn on any savings account when tax is taken into consideration, and to choose your account accordingly.”
However, rubbish as it might be that banks are trying to get away with offering lower rates of interest than they ‘should’, it is unlikely that even the poorest deals are going to make ISAs non-viable. Take a higher rate taxpayer, who saves 40% tax on interest earned in an ISA -- a non-ISA account would need to pay an interest rate that was 2/3rds higher in order to be more beneficial overall. Even for basic rate tax payers, where the tax saving is only 20%, the taxable rate would still need to be 25% higher to make an ISA a bad deal. The Northern Rock rates quoted above show non-ISA rates that are 6% and 7.5% higher respectively.
So in summary, are banks out to make as much money for themselves? Yes. Are ISAs a bad deal? Probably not.