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Peer accuses banks of pocketing ISA tax relief

A Tory backbench peer will today accuse the high-street banks of "taking advantage of people" by withholding tax relief on cash ISAs. Baroness Stowell of Beeston will call on the Treasury to get tough on the financial institutions that she says are short-changing savers.

Lady Stowell said: "Only customers, not banks, are supposed to benefit from the ISA tax relief." She pointed out that a review of some of the high-street banks' websites has revealed evidence that some banks are offering better deals in their fixed-rate bond accounts than in their fixed-rate cash ISAs. In other words, some banks are not passing on the full tax relief to their customers and are retaining something which is not theirs to keep.

The Halifax, for instance, is offering a one-year, fixed-rate ISA at 2.5 per cent. But a one-year, fixed-rate bond offered by the bank – which is part of the 41 per cent taxpayer-owned Lloyds Banking Group – pays 3 per cent. That's 20 per cent more interest, which effectively wipes out the tax benefit of taking out an ISA. Santander, meanwhile pays just 2 per cent on a one-year, fixed ISA (up to £8,500) but 3.35 per cent on a one-year, fixed-term bond.

"The assumption we have to make is that some of the banks are taking advantage of people who are doing the right thing," said Lady Stowell, who will call during Question Time in the House of Lords this afternoon for the Treasury to take action. Her review revealed that the Nationwide is the only ISA provider which guarantees fixed rates.

"Those banks taking advantage of their fixed-rate cash ISA savers should stop now, and all banks should give their customers a guarantee that they will always match or better their equivalent fixed-rate bond accounts so savers – and not the banks – receive the tax relief which is rightfully theirs," demanded Lady Stowell. "One of the high-street building societies is already doing this, so there is no excuse for all banks and building societies not to be doing the same."

Prashant Vaze, the head of fair markets at Consumer Focus – the Government-funded watchdog – supported Lady Stowell's call for banks to pass on the full tax relief to cash ISA savers. "The Government provides tax relief on cash ISAs to encourage people to save for a rainy day," he said. "It goes without saying that savers are entitled to get the full tax relief from their cash ISA. It's clearly unacceptable that cash ISAs are treated as cash cows by banks which shave off some of the tax relief for themselves. We agree that cash ISAs should offer pre-tax interest rates at least as good as savings bonds or other long-term savings products offered by the same bank."