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Are current accounts currently better than cash ISAs?

With the April 5th ISA deadline approaching our research finds that almost 1/3 of people use their current account for savings, and a further 35% would consider it

ISAs or current accounts 2015/16ISAs or current accounts 2015/16

The April 5th ISA deadline has long been a cue for savers to top up their ISAs and take advantage of the annual tax-free allowance, which was increased to £15,000 for cash ISAs in last year’s budget.

However, interest rates on current accounts are as high 5% while the best rate for an instant access cash ISA are only 1.5%, which could mean a difference of almost £111 on a full ISA allowance of £15,000 for a basic rate tax payer.

Even higher rate tax payers could earn more with a highest rate. As our tables below show, the only time the best ISA beats the best current accounts is for those paying the highest 45% tax rate.

Interest based on savings of £2,000 (2015/2016 tax year)

Savings account AER on £2000 Gross interest Interest earned (20p tax rate) Interest earned (40p tax rate) Interest earned (45p tax rate)
Post Office Easy Access ISA 1.5% £30 £30 £30 £30
Nationwide FlexDirect* 5% £100 £80 £60 £55
Santander 123 Account 2% £40 £8 £0 -£2
TSB Classic Plus 5% £100 £80 £60 £55

Interest based on savings of £15,000 (2015/2016 tax year)

Savings account AER Gross interest Interest earned (20p tax rate) Interest earned (40p tax rate) Interest earned (45p tax rate)
Post Office Easy Access ISA with 1.5% AER 1.5% £225 £225 £225 £225
Nationwide FlexDirect 5%* £125 £100 £75 £68.50
Santander 123 Account 3%** £450 £336 £246 £223.50
TSB Classic Plus 5%*** £100 £80 £60 £55

Want to look at all high interest savings accounts? Take a look at our high-interest accounts tables.

* up to £2,500, 0% on everything above £2,500 ** above £3,000, up to £20,000 ***up to £2,000, 0% on everything above £2,000

Shunning savings for current accounts

So what are the UK’s savers doing? We surveyed 6,500 people and found that:

  • almost a third (31%) of people use their current account to save, and a further 35% would consider doing so
  • young people (24%) and Londoners (28%) are the most likely to use their current account – shunning traditional savings accounts and ISAs
  • just a quarter (25%) know the rate of interest on their current account – men (32%) are almost twice as likely as women (18%) to know
  • more than half (51%) are seeing their money languishing on rates of less than 1% – just one in ten (10%) are enjoying the best rates of more than 3%

Low interest rates

Interest rates have been stuck at rock bottom lows since 2009, which has been good news for borrowers but bad news for those with savings who struggle to find decent rates for their cash deposits.

base rate march 2015

Most current accounts don’t pay interest more than 1% on cash deposits and with the best instant access cash ISAs only paying around 1.5%, it can seem like savers don’t have many options to put their money to work.

ISA basics

Any interest earned in an ISA is tax free (but the amount you can invest in one is limited to £15,000), whereas any interest earned in current accounts is taxed at the marginal rate.

This means, depending on your existing income and tax bracket, you will be losing either 20, 40 or 45% of your interest to the tax man if you put your money in a current account.

Though this looks set to change in the 2016/17 tax year, when the first £1000 of interest earned will be tax free for basic rate taxpayers and the first £500 for 40% taxpayers.

* First 12 months only

**Interest earned includes deduction of £24 annual fee

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