Banks are stealing your tax relief

Banks are benefitting from tax relief meant for you by offering lower interest rates on ISAs than on standard savings accounts...

You would have thought that a bailout to the tune of several hundred billion pounds would have been enough. But no, the banks are not content with the astronomical cheque you write them every month. They want a slice of what little tax relief you have as well.

Last week the Conservative peer, Baroness Stowell of Beeston, accused high-street banks of ‘taking advantage’ of people by offering lower interest rates on cash ISAs than on similar savings accounts.

They are able to get away with this because cash ISAs pay interest free of tax, while savings accounts are subject to income tax. So even if a cash ISA has an APR that is 15% less than its equivalent savings account, it will still offer a higher real return after the basic 20% rate of income tax has been applied.

But by offering lower interest rates on cash ISAs, banks are taking advantage of tax relief meant for you. Consequently, Baroness Stowell has called for the government to crack down on these tax-stealing banks and force them to pay the same amount of interest on ISAs and savings accounts of equivalent lengths.

So in light of these revelations, I’ve been taking a look at the banks that are cashing in on your tax-free ISA allowance...

Easy access

Here are a few cash ISAs that offer a lower rate of interest than a savings accounts with the identical term; the minimum deposit amount is listed next to the APR...

Provider	Cash ISA	Cash ISA APR	Savings account	Savings account APR
Post Office	ISA	2.25% (£100+)	Online Saver	2.85% (£1+)
Yorkshire BS	E-ISA	1.90% (£10 - £9,999)	Internet Saver	2.10% (£1 +)
Sainsbury’s Finance	ISA	2.50% (£500+)	Online Saver	2.85% (£1,000+)
Sainsbury’s Finance	ISA	2.50% (£500+)	Easy Saver	2.60% (£1+)

The Post Office Online Saver offers a considerably higher rate than its cash ISA. In fact, even after 20% income tax is deducted from the Online Saver rate, it still beats the cash ISA.

The Sainsbury's Finance cash ISA also has a lower interest rate than two similar easy access savings accounts. And you’ll need to deposit at least £500 into this ISA to qualify for the 2.50% rate.

The best easy access ISA: Nationwide currently has the market leading easy-access cash ISA offering a 3.10% rate on your savings. What’s more, Nationwide is one of the honourable exceptions that offer the same rates on bonds and ISAs of equivalent lengths.

One year

Onto the one year accounts...

Provider	Cash ISA	Cash ISA APR	Savings account	Savings account APR
Santander	Postal ISA	2.00% (£500+) 3.00% (£8,500+)	Bond	3.35% (£1)
Halifax	ISA Saver	2.50% (£500+)	Guaranteed Reserve	3.00% (£500+)
NatWest & RBS	ISA	2.65% (£1,000+)	Bond	3.00% (£5,000+)
ING Direct	ISA	2.80% (new customers)	Saver	3.00% (new customers, £1+)
Barnsley BS	Online ISA	3.15% (£100+)	Online Bond	3.40% (£1,000+)
Norwich and Peterborough BS	ISA	2.85% (on a £5,340 deposit)	Bond	3.00% (£1,000+)

Santander is top of the tax-pinching list for one year accounts, offering 1.35% more interest on its 12 month savings bond than it does on its one year Postal ISA - if you deposit less than £8,500, that is. But in fairness, the Spanish bank is also offering a 3.30% Flexible ISA deal that tracks 2.80% above the Bank of England Base Rate. However this account does not accept transfers in from other ISAs.

The best one year ISA: Despite appearing in the table above, the Barnsley Building Society Online ISA is the market leading one year account, offering a 3.15% rate with a minimum deposit of £100. The equivalent Online Bond offers a higher interest rate of 3.40%; but is still beaten by the ISA after 20% income tax is deducted.

Two years

Here’s how the two year accounts compare...

Provider	Cash ISA	Cash ISA APR	Savings account	Savings account APR
BM Savings	ISA	3.40% (£500+)	Bond	3.85% (£1+)
NatWest & RBS	ISA	3.20% (£1,000+)	Bond	3.75% (£5,000+)
The AA	ISA	3.50% (£1+)	Fixed Rate Savings Account	3.65% (£1)
Santander	Postal ISA	3.70% (£500+)	Bond	3.80% (£1)

Despite being owned by Lloyds – another honourable bank that does not steal your tax relief – BM Savings’ two year bond pays almost half a percentage point more than its equivalent cash ISA. What’s more, the minimum deposit for the ISA is 500 times higher than the minimum deposit for the bond.

The best two year ISA: Lloyds TSB has the market leading two year ISA offering a 3.60% rate. But you will have to deposit a minimum of £3,000 to be eligible for the account. If this isn’t you, Chelsea Building Society has a two year ISA with a 3.50% rate on offer, with a minimum deposit of just £100.

Three years

And this is how the three year accounts shape up...

Provider	Cash ISA	Cash ISA APR	Savings account	Savings account APR
NatWest & RBS	ISA	3.70% (£1,000+)	Bond	4.00% (£5,000+, average interest rate)
Yorkshire BS	ISA	3.80% (£100+)	Bond	4.05% (£1,000+)
Northern Rock	E-ISA	3.50% (£500+)	E-Bond	3.70% (£1+)
Northern Rock	ISA	3.40%(£500+)	Bond	3.50% (£1+)

As you can see, the rate differences are starkest between the NatWest, RBS and Yorkshire Building Society accounts. Although it is worth pointing out that the minimum deposits are higher for the standard savings accounts than they are for the cash ISAs.

The best three year ISA: Despite their presence in the table, it’s actually NatWest and RBS who lead the pack when it comes to three year ISAs, with a 3.70% rate.

Longer term accounts

On accounts longer than three years, the only tax-pinching account I can find is the 5.00% APR BM Savings five year Cash ISA. But in fairness, the rate on this ISA is only 0.05% lower than the equivalent bond, and it is the marketing leading deal for a five year ISA!

Your sightings

Have you spotted any tax relief-pinching ISA accounts?

Let us know in the comment box below.

More: Compare ISAs and savings accounts with lovemoney.com | The top 16 cash ISAs | 16 top cash ISAs for transfers