A Conservative peer says those banks paying less interest on their Isa products than on normal savings bonds are ?benefiting from the tax relief?
Banks are taking advantage of tax relief to pay less interest on cash Isas than on equivalent taxable savings products, according to a Conservative peer.
Baroness Stowell says some high street banks are offering better returns on fixed-rate bonds, on which tax is payable, than on tax-free fixed-rate Isas running for the same length of time. She is calling on the Treasury to force banks to pass on the full amount of interest she believes customers are due.
Stowell said: ?Cash Isas are a great incentive for us all to save. We benefit, and so do the banks: last year 15 million of us held ?172bn in cash Isas. But only customers, not banks, are supposed to benefit from the Isa tax relief. The assumption we have to make is that some of the banks are taking advantage of people who are doing the right thing.?
Nationwide building society pays the same level of interest on bonds and cash Isas of equivalent length. Robin Bailey, savings and investment director for the society, says: ?We have taken the view that there is no logic in pricing differently because customers are committing for the same length of time. But some [banks] do pay a slightly lower interest rate on fixed-rate cash Isas [compared to bonds of the same duration] in the knowledge that the Isa customer is tax advantaged, so it?s still a better deal for them.?
A spokesperson for Lloyds TSB said: ?Both Lloyds TSB fixed and variable rate Isas are covered by the Lloyds TSB Isa commitments which ensure that during this year?s Isa season, on the day a saver opens a new Lloyds TSB Cash Isa its rate will match or beat our equivalent standard savings rate. From a Halifax perspective we would encourage savers to open our Halifax Isa Direct Reward (3%) over a bond of the same term.?
However, Northern Rock, which is owned by the UK taxpayer, does pay different rates on some of its bond and Isa products. It is currently paying 3.5% on its three-year fixed-rate bond, for example, but only 3.4% on its three-year fixed-rate cash Isa.
Likewise, Saga is paying 4.2% on its three-year fixed-rate bond and just 4% on its three-year fixed-rate cash Isa.
A Northern Rock spokeswoman said: ?There are many different factors taken into account when setting the interest rate a given product will pay, and Northern Rock has an extremely strong savings range with competitive rates.
?It is incorrect to suggest that we uniformly pay more on taxable fixed-rate bonds than equivalent fixed-rate Isas ? for example, our current one-year fixed-rate bond pays 2.85% while our one-year fixed-rate Isa pays 3%, and our one-year E-Bond pays 3%, while the one-year fixed-rate Isa pays 3.1%.?
Consumer Focus supports Stowell in her call for fair interest rates for Isa savers. Head of fair markets Prashant Vaze said: ??It is clearly unacceptable that cash Isas are treated as cash cows by banks who set lower interest rates, effectively shaving off some of the tax relief for themselves.
?We fully 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.?
Jill Insley
guardian.co.uk ? Guardian News & Media Limited 2011 | Use of this content is subject to our Terms & Conditions | More Feeds
Source: http://globaldailybusiness.com/money-matters/4205-banks-fail-to-pass-on-isa-relief/
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