ISA Tax Bonus Pocketed by Banks

Banks and building societies are denying tax benefits to savers and devaluing the ISA brand by paying out more on taxable bonds compared to their fixed-rate ISAs. In some instances, you can earn more in a taxable bond, even after paying tax, than a tax-free ISA.

Typically, fixed-rate ISA accounts require savers to tie up their cash for one to two years in return for a fixed-rate of interest. The amount paid in interest is higher than the easy-access equivalents that allow you to withdraw your cash at anytime without penalties. ISAs draw in customers who are attracted with the additional benefits of tax-free savings; unfortunately, some banks are pocketing the tax bonuses and providing customers with a comparatively low interest rate.

A prime example is Lloyds TSB, their fixed-rate ISA pays 2 per cent interest per annum; however, their one-year taxable bond pays 2.2 per cent after tax!

A Lloyds spokesman commented that their ‘fixed-rate bonds are not priced against ISAs, but with other fixed-rate bonds that are on the market’.

The gap between ISA interest rates and taxable bonds widens in the long-term savings market. For example, Halifax pay out 3.5% on a fixed-rate, tax-free ISA but surprisingly pay out 4.1% on a taxable bond.

Chief executive of the TaxPayer’s Alliance, Matthew Elliot stated that ‘this kind of sharp practice threatens to harm ISA as a brand, as well as depriving savers of tax bonuses that should be theirs’.