Should you rush to use your Isa before the deadline?

The cash Isas being offered by the banks look dismal. But don't ignore the tax advantages
  • @simonnread

The banks this week began to reveal their cash Isa offerings for the end of the current tax year, but to date they haven't been terribly tantalising.

Santander launched its range on Monday with a two-year, fixed-rate deal paying 2 per cent. Sound a little disappointing? Anna Bowes of agreed. "The launch of the Santander Cash Isas is usually an indication of how the Isa season will progress," she said. "Unfortunately, this year it has confirmed fears that providers' appetite for savers' cash remains limited."

Also on Monday, Barclays added a three-year Flexible Cash Isa to its range. The interest rate offered is just 1.8 per cent, but you are allowed to make withdrawals.

However restrictions make the offer much less flexible than Barclays would like you to think. You are only allowed to make three free withdrawals during the three-year term and then they can't be more than 10 per cent each of the current balance at the time.

Halifax topped that deal on Tuesday with an 18-month Isa paying 2 per cent. But that, too, disappointed Ms Bowes.

"These launches are unlikely to get anyone too excited and it is hard to see any major providers making a big statement in this Isa season. Providers' need for Isa funds has rapidly reduced, which is likely to disappoint savers looking for better rates. We desperately need competition to return to the market and there's little sign of that coming any time soon."

There are two things to bear in mind, though: first is that other Isa providers may come in with better offers before the 5 April deadline.

Second is the fact that to beat a 2 per cent tax-free Isa, you'd need to find a standard savings account paying 2.5 per cent.

That's because you pay no tax on the gains on money in an Isa, so the returns you get are gross. In short, if an Isa promises 2 per cent interest that's how much you'd get.

Normal savings accounts would end up paying just 1.6 per cent after basic rate tax. However, if you're a higher-rate taxpayer the situation is even worse. Your 2 per cent would actually only net you 1.2 per cent after tax.

In the current tax year –which ends on 5 April – you are allowed to put up to £5,760 in a cash Isa. (You can add a further £5,760 into an equity Isa.) If you have money languishing in a normal account then it makes sense to use your tax-free allowance.