Higher rate tax payers are still struggling to earn the 6% on taxed savings needed to beat inflation
Higher rate tax payers still have no incentive to put money in taxable savings accounts, despite inflation falling for the fourth month in a row.
Inflation as measured by the government’s favoured index, CPI, fell from 5.2% in September 2011 to 3.6% in January 2012.
The drop means that rates paid on some tax-free Isa accounts are high enough to protect savers’ money from being eroded by inflation. But Andrew Hagger of Moneynet says that since December 2009 no savings account has paid enough interest on lump sum deposits to exceed the combined effects of higher rate tax and inflation.
Higher rate tax payers need to earn 6% on accounts where interest is taxed, and only regular savings accounts from HSBC and First Direct currently pay rates exceeding this level. Both pay 8% gross fixed for 12 months, but to open an account savers must have a current account with the banks and deposit between £25 and £300 a month.
Basic rate taxpayers need to earn 4.5% on accounts liable to tax. The highest paying account on offer is from BM Savings paying 4.65% for five years, with a minimum balance of £1.
In an Isa, where interest is not taxed, any account paying more than 3.6% is inflation-beating.
Moneyfacts has calculated that £10,000 invested five years ago, earning average interest and taxed at 20%, would now have the spending power of just £9,190, allowing for the effects of inflation.
Spokeswoman Sylvia Waycot says: “The number of savings accounts that beat inflation has risen from a miserly eight last month to a much more respectable 47, many of which are fixed rate Isas.
“However, this is a small blessing when compared to the total number of standard savings accounts available, which is 1,100.”
She adds that the average no-notice savings account pays “a miserly 0.92% which shows the size of the problem”.
For those wanting to beat inflation but minimise the length of time their money is tied up, Governor Money, part of the friendly society Family Investments, has a special fixed-rate Isa deal with the Progressive building society paying 3.75% for two years with a minimum opening balance of £100.
C&G’s Fixed Rate Isa 13 will pay 3.9% for three years on a minimum balance of £500, while Yorkshire Bank is paying 4.4% for four years on a minimum balance of £2,000.
Hagger says the vast majority of people will still do better to pay off debt, depending on the interest charged on their borrowings. But he adds: “Some mortgage borrowers are low tracker rates set at 3% or less, and in those circumstances they would benefit from putting their money into savings.”