Interest rates. 13 April 2022 at 8:13AM in ISAs & tax-free savings 2 replies 623 views

Rabbit53

Can anyone explain why the interest on an ISA is always lower than an ordinary savings account.  For example I year fixed rate ISA 1.1%.  Same bank, I year fixed rate savings account 1.4%.    OK, I know the ISA is tax free but why would that affect the rate as the banks do not deduct tax on any of them.  I also understand that the banks have to report the tax to HMRC but that is mainly for the Fixed account.   Thanks.  

masonic

Aside from the additional rules and reporting requirements around ISAs (which create extra work and training requirements for staff), fixed term ISAs must allow access, unlike fixed term savings accounts which can require that your money cannot be accessed during the term. Obviously if money must be accessible, more of it must be held in capital reserves not earning the bank interest compared with normal fixed term savings accounts, because there must be money available to repay savers who break the fix early. Therefore, all fixed term ISA accounts are actually easy access accounts with penalty for early access, which would put the accessibility somewhere between easy access and notice accounts, so these are the accounts with which you should compare them.

The top 1 year fixed term ISA pays 1.4% (instant access with 90 day interest penalty), which compares favourably with the top standard notice account also paying 1.4% (95 days notice).

Albermarle

It maybe you do not need to use an ISA savings account anyway .
What is the personal savings allowance? (moneysavingexpert.com)