Earn 4.25% on your savings tax-free!

Find out where you can earn a top rate on your savings and keep your cash out of the taxman's hands.

Until the base rate starts to climb again, you can expect rates on savings accounts to stay pretty low across the board. But that doesn’t mean you should stop shopping around for the most competitive returns, because there are still some reasonable rates out there if you know where to look.

Fixed rate ISAs

If you haven’t yet used up your cash ISA allowance for the current tax year (which began on 6 April 2010 and runs until 5 April 2011), and you’re happy to lock your savings away for a while, a fixed rate ISA will offer the most competitive guaranteed rates. And, of course, everything you earn will be completely tax-free.

At the moment, you can earn a decent rate of 4.25% over the next four years with the Fixed Rate Halifax ISA Saver. You can also earn the same top rate with the Birmingham Midshires 5 year Fixed Rate ISA but, as the name suggests, the fixed term lasts longer at five years.

Given that the rate on these ISAs is 4.25%, to earn an equivalent return in an ordinary taxable savings account, a basic rate taxpayer would need at least 5.31%, while a higher rate taxpayer would need a rate of 7.08%.Meanwhile, the highest rate taxpayers (who earn over £150,000) would need to earn a massive 8.5%.

But, of course, earning rates this high from savings accounts is totally out of the question in the current climate.

Is 4.25% good enough?

All you have to do now is decide whether you think this 4.25% tax-free rate is generous enough to be tied into for the next few years. Obviously, there’s no way to guarantee that the return will stay as competitive throughout the term as it is now. And there’s a distinct possibility that when the base rate finally increases, and savings accounts in general start to improve, a rate of 4.25% could get left behind by the new cash ISAs which join the market in the coming months and years.

But for now, 4.25% is the market-leader and it isn’t possible to beat this rate with any other high street savings account (excluding accounts which require you to open a linked investment product or variable rate accounts which track inflation).

It’s true you can earn higher headline rates with a fixed rate bond - the ICICI HiSAVE Fixed Rate Account, for example, pays 4.75% fixed over the next five years - but once tax has been deducted from the interest earned, the Fixed Rate Halifax ISA Saver is still the winner.

How does the ISA saver work?

Perhaps, you’re happy to fix your rate at 4.25% regardless of what might happen to interest rates over the next four years. If this is the case, let’s take a look at what the Fixed Rate Halifax ISA Saver can offer you.

You’ll be able to open the ISA online (or in branch or by phone if you prefer) with a minimum of £500 up to a maximum of £5,100 - your full cash ISA allowance for this tax year. If you save the maximum deposit, you’ll earn almost £217 in interest every year throughout the fixed term. And, remember, this amount is completely guaranteed.

Recent question on this topic

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Bear in mind, once you’ve opened the account it can’t be topped up. You won’t be able to make any withdrawals during the fixed rate period either. However, if you realise you need to get your cash out, the ISA can be closed at any time, but this will incur a penalty equivalent to 180 day’s interest.

The Fixed Rate Halifax ISA Saver also accepts ISA transfers. If you already have money sloshing about in old cash ISAs from previous tax years, these can be switched into the Halifax account where they’ll earn the same 4.25% fixed rate.

The chances are your old ISAs will be earning less than impressive rates now, particularly if you haven’t transferred them before. You can give them a new lease of life by moving them into today’s market-leader.

Four years is too long

If four years is too much commitment for your cash, the Fixed Rate Halifax ISA Saver is also available over one, two and three-year terms. Unfortunately, the rates on offer over these shorter periods just aren’t as competitive. The one year version, for example, offers a tax-free rate of just 2%, but savers can earn 3% with a 1 Year Fixed Rate ISA from Aldermore on deposits of £1,000 plus. Meanwhile, Cheshire Building Society offers 2.75% on its 1 year Fixed Rate ISA (Issue 20).

Both accounts put the short-term Fixed Rate Halifax ISA Saver in the shade.

Compare cash ISAs at lovemoney.com

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