Best And Worst Tax-Free Savings Accounts

With hundreds of cash ISAs to choose from, where do you start? We unveil the Best Buys and Don't Buys for 2006/07!

If you're aged sixteen or over, you can stash money in a delightful tax-free savings account known as a cash ISA (Individual Savings Account). Of course, HM Revenue & Customs doesn't want to miss out on too much tax, so it puts a cap on your contributions to a cash ISA of £3,000 per tax year.

Note that the 2007/08 tax year starts on 6 April (which is also Good Friday), so you have only until 5 April to grab your annual ISA allowance for 2006/07. In addition, from 6 April 2008, the cash ISA limit increases to £3,600 per tax year, so you can earn tax-free interest on an extra £600 a year from that point onwards.

Mind you, the latest annual survey of cash ISAs from independent financial researcher Moneyfacts shows that you need to act quickly to grab the best deals. This survey compared the 169 cash ISAs that were available on 6 April 2006 to see how much interest each generated during this tax year. Assuming that the full £3,000 was invested on day one, no withdrawals were made, and all interest was left to roll-up in the account, here are the Best Buys:

Top Twenty Cash ISAs for 2006/07

*Rank*	*Provider*	*Value (£)*	*Notice or term*	*Notes*
1	Alliance & Leicester	3,163.46	None
2	National Counties BS	3,161.65	Instant
3	National Savings & Investments	3,161.36	None
4	Saffron BS	3,157.91	180 days
5	Tipton & Coseley BS	3,157.63	30 days
6	Kent Reliance BS	3,157.17	None
7	Bradford & Bingley	3,157.14	None
8	Portman BS	3,156.94	15 days
9=	Yorkshire BS	3,155.48	None
9=	Yorkshire BS	3,155.48	30 days
11	Saffron BS	3,154.98	30 days
12	Derbyshire BS	3,154.97	Instant	Over-55s only
13	National Counties BS	3,153.94	Instant
14	Cambridge BS	3,153.90	60 days	Only existing members/customers
15	Newbury BS	3,153.65	60 days	Local savers only
16	Teachers BS	3,153.64	Instant
17	Bradford & Bingley	3,153.00	1 year	Fixed rate
18	City of Derry BS	3,152.68	30 days	Local savers only
19	Leek United BS	3,152.32	Instant
20	Dunfermline BS	3,152.04	30 days

As you can see, Alliance & Leicester takes top honours with interest of £163.46 over the year, which equates to a tax-free return of 5.45% on £3,000. Its no-notice Direct ISA account was launched on 9 January 2006 with an annual interest rate of 5.20%, plus an introductory 0.70% bonus. This bonus was withdrawn on 12 April 2006, so you needed to be quick off the mark to obtain one in this tax year.

It's worth noting three things: first, the table is dominated by building societies, which claim sixteen of the top twenty places. Thus, it clearly pays to save with mutuals (member-owned societies), rather than the big banks. Second, the top three accounts in this table are no-notice accounts, which proves that you don't have to tie up your money for long periods to earn the best returns. Third, last year's table was dominated by fixed-rate bonds, which accounted for nine of the top ten cash ISAs. This year, the highest fixed-rate account, from Bradford & Bingley, crept in 17th.

Overall, the average value across all 169 accounts was £3,141.36, which works out at 4.71% a year. However, there's a large gap between the best and worst accounts, as my second table shows:

Big Boys and Don't Buys for 2006/07

*Rank*	*Provider*	*Value (£)*	*Notice or term*	*Notes*
31	Nationwide BS	3,150.06	60 days	Only existing members/customers
33	Halifax	3,150.00	1-4 years	Fixed rate for 1, 2, 3 or 4 years
39	Halifax	3,149.81	None
40	Bradford & Bingley	3,149.68	3 years
51	Marks & Spencer Money	3,146.69	None
52	Abbey	3,146.67	Instant
53	Intelligent Finance	3,146.37	None
54	Abbey	3,146.33	None
56	Northern Bank (NI)	3,145.62	None
62	HSBC	3,144.86	Instant	Only existing customers
69	First Trust Bank (NI)	3,143.98	Instant
73	NatWest	3,143.52	Instant
86=	Northern Rock	3,142.10	15/04/07	Fixed rate
86=	Northern Rock	3,142.10	15/04/10	Fixed rate
94	Smile	3,141.21	None	Only existing members/customers
95	Nationwide BS	3,141.06	Instant
102	First Direct	3,140.31	None
122	Bradford & Bingley	3,136.18	Instant
124	Lloyds TSB	3,135.99	None
132	Northern Rock	3,134.86	30 days
133	Cheltenham & Gloucester	3,134.72	Instant
134	Royal Bank of Scotland	3,134.47	Instant
135	National Savings & Investments	3,134.43	None
142	Alliance & Leicester	3,133.58	30/04/07	Fixed rate
146	HSBC	3,130.08	Instant
151=	Woolwich	3,129.54	Instant
151=	Barclays Bank	3,129.54	None
153	Saffron BS	3,128.81	Instant
157	Abbey	3,124.70	Instant
158	Virgin Money	3,123.86	None
159	Bank of Ireland (NI)	3,123.29	None
161	Ulster Bank (NI)	3,121.74	Instant	Local savers only
163	Smile	3,120.48	None
165	Co-operative Bank	3,119.46	None
167	Northern Rock	3,116.98	Instant
168	Halifax	3,112.52	Instant
169	Alliance & Leicester	3,109.51	Instant

It's clear that the UK's big banks and former building societies continue to let down their customers with poor showings in this table. Halifax's highest entry is at 33, Abbey comes in at 52, HSBC at 62, NatWest at 73, Northern Rock at 86, First Direct at 102, Lloyds TSB at 124, Royal Bank of Scotland at 124, and Barclays/Woolwich at 151.

Oddly, Alliance & Leicester bookends the table, taking first and 169th place. Northern Rock must be relieved to avoid the wooden spoon, which it won in the past three surveys!

The difference between the values of the first- and last-placed accounts is £53.95, or an extra 1.8% over the course of the year. This extra interest would be particularly rewarding to, say, a couple which has amassed two cash ISAs per year since these accounts were introduced in 1999/2000.

In summary, this survey clearly shows the worth of shopping around for a Best Buy cash ISA, and the value of acting quickly to take advantage of attractive short-lived deals. For the latest on great rates presently, read this article.

Happy tax-free saving, everyone!