Fixed ISAs outpace fixed bonds as returns go from strength to strength

With opportunity to secure a competitive rate soaring, could an ISA prove beneficial in maximising your returns?

The fixed rate savings market continued to flourish at the start of August, the most recent Moneyfacts UK Savings Trends Treasury Report has revealed.

Encouragingly for those in need of tax-free saving, at the beginning of August the savings market shifted in favour of ISAs, seeing savers offered the strongest fixed returns in years. This change saw the average one-year fixed ISA rate rise to 4.24% at the start of the month, outpacing the average one-year fixed bond which increased to 4.23%. Meanwhile, those wanting to lock into a longer-term fix will find the average longer-term ISA rate reached 4.27%, its highest since January 2024, while its average non-ISA equivalent jumped to 4.25%. This is also the highest it has been since January 2024.

“Historically, savers have often faced a trade-off between securing competitive rates outside an ISA or keeping their interest tax-free,” Caitlyn Eastell, Personal Finance Analyst at Moneyfactscompare.co.uk, commented. “However, this shift could mean that this compromise may no longer be necessary,” she continued.

More opportunity for savers as product choice grows

In the wider savings market, product choice continues to beat all-time highs, with a staggering 2,617 savings accounts and ISAs on the market. What’s more, the opportunity for savers to secure a competitive return is growing, with 1,412 accounts paying above base rate (3.75%) at the beginning of August – the highest number since July 2012.

“While growing choice is great for returns, savers, particularly higher-rate taxpayers, must carefully consider where they keep their pots. Moving to a competitive ISA could mean more of their returns stay in their pocket,” Eastell highlighted.

“For a saver with £20,000, the average one-year ISA rate would give around £848 in interest over a year, compared with £846 in a non-ISA account,” she added.

This £2 gap may not seem like much, but Eastell explained choosing an ISA could lead to a much bigger difference for a higher-rate taxpayer. They could be around £138 better off because they will keep the full amount of interest earned, unlike on the standard savings account where they could lose over £100 in tax. “On larger balances, the benefit of switching becomes even more apparent,” she added.