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Cash ISAs: How to get faster-growing returns

ISA eggTax savings on your cash ISA will keep building year after year – so don’t forget to make full use of your annual allowance.

With the end of the tax year upon us, banks and building societies are scrambling to attract ISA savers’ cash.
At midnight on 5 April, anyone who has failed to use up this year’s £5,100 cash ISA allowance will lose it.

You will still be able to put money into an ISA on 6 April, and beyond – but that will come out of the 2011-12 allowance, which is increasing in line with inflation to £5,340.

Why is it so important to use as much of your ISA allowance as you can? Well, not only do ISAs tend to pay rates as high, if not higher, than the best standard savings accounts, but the interest you earn on them is free of income tax.

So on an ISA paying 3 per cent interest a year, a holding of £5,100 would give you £153 interest – and you get to keep the lot.

On a normal savings account paying 3 per cent, your £153 interest would be reduced by £30.60 if you were a basic-rate (20 per cent) taxpayer, so you’d be left with £122.40 after tax.

A higher-rate taxpayer (at 40 per cent) would lose £61.20, leaving just £91.80.

ISAs make your money grow faster

The benefits of ISAs can be much more clearly illustrated when you look at your returns as they accumulate over a period of years.

Remember, if you invest your full ISA allowance this year, you don’t just save tax over the next 12 months: you save tax every year until you withdraw the money.

This means your ISA savings grow faster than in a normal savings account.

Even if you’re not a taxpayer at the moment – for example, if you’re a student – you should still use your ISA if possible, because you will be able to save tax in future years when you are in work.

Chris Griffiths, head of savings at, says: “Using your ISA allowance each year and adding to it is really important: the real win with ISAs comes as your tax-free savings grow, so £5,100 this year added to another £5,340 (with next year’s allowance) starts to give you some significant earnings as the interest compounds.”

Figures compiled by (see table below) show the difference saving in an ISA can make over three years compared with normal savings accounts. The interest is calculated on a deposit of £5,100:

ISA interest over 3 years
Account AER interest rateNet interest rate Interest over 3 years
C&G Direct Transfer 0.05% 0.04% £6.12
HSBC Online Bonus Saver 0.75% 0.60% £92.35
NatWest e-ISA 2.00% 1.98% £308.98
RBS 3 year fixed rate ISA 3.70% 3.70% £587.30

*Rates correct as of 7 March 2011

On an initial deposit of £5,100, the non-ISA Direct Transfer account from Cheltenham & Gloucester would pay just £6.12 over three years at an annual interest rate of 0.05 per cent, or 0.04 per cent after basic-rate tax is deducted.

(Admittedly this is a very low-paying account, but savers who fail to regularly review their interest can easily end up getting negligible returns as banks cut rates.)

The HSBC Online Bonus Saver, paying 0.75 per cent a year, would produce £92.35 over three years after tax.

But a high-paying ISA, such as Royal Bank of Scotland’s three-year fixed-rate ISA at 3.7 per cent a year, would generate £587.30 tax-free over the period.

A non-ISA account paying the same rate would return you £469.84 if you were a basic-rate taxpayer: almost £120 less.

That’s why it’s important to get the best rate not just on your new deposits, but also on your ISA holdings from previous years.