Santander leading the way in battle of the Isas as major high street banks vie for your savings

Most of the major high street banks have now shown their hand as the annual individual savings account (Isa) season gets into full swing.

During the last three weeks there’s been a steady stream of new Isa accounts launched as we approach the tax year crossover, with providers seeking to tempt us into using up the rest of our annual tax-free allowances.

One of the most impressive deals so far is from Santander, which has taken over the top spot in the two-year fixed rate Isa best buys table with an account paying 4 per cent.

This is a great opportunity for savers looking to transfer their existing Isa savings too, not something you’ll always find with the best buy deals where you’re often restricted to the current year allowance.

Another deal that caught my eye was from Leeds Building Society, a one-year fixed rate Isa with limited access paying 3 per cent. This hybrid product offers the best of both worlds – fixed rate plus some access – and will appeal to those who are worried about locking their entire tax-free savings balance away for the next 12 months.

As you’d expect, there are better one-year fixed rates out there, with Santander again leading the way with an account paying 3.5 per cent.

Barclays has launched its new Loyalty Reward ISA, paying 3.05 per cent to existing customers although, as has been the case in the last couple of years, the account is open for new ISA money only.

For non-customers, the best Barclays rate is a fairly mediocre 2.75 per cent AER through its Isa Saver Issue 2. I’m not sure there will be much demand for this, with more than a dozen instant access Isas paying 3 per cent or above.

If you prefer a fixed rate and you’re happy to have your money locked away for a period, Clydesdale Bank has just launched two eyecatching new accounts. Both are very competitively priced, with the two-year option paying 3.6 per cent AER and the five-year version fixed at 4.25 per cent AER. A transfer in of previous year Isa balances is permitted and interest is paid annually.

On a couple of occasions recently, I’ve heard people questioning the benefit of putting money in a cash Isa, saying they don’t see the point when savings interest rates are so low. It’s easy to see why some may dismiss Isas as hardly worth the effort, with a basic rate taxpayer currently better off by £39.48 per year based on the maximum cash sum of £5640 at the best instant access ISA rate of 3.5 per cent.

If you break this down, however, you get an extra £3.29 per month in your pocket rather than in the coffers of HMRC – it may not sound a great deal, until you look more closely at the cumulative effect of long-term Isa saving.

For example, if you were to save £5,640 in a tax-free Isa every year for the next ten years, assuming that rates stay at the same level you will earn £10,857 in interest over that time and save yourself £2,171 in tax. You’ll also have built up a capital sum of £56,400.

The benefits for a higher rate taxpayer are even more compelling, as a 40 per cent taxpayer will save £78.96 in year one and over a ten-year term will have prevented the taxman from getting his hands on £4,343 of his interest.

These numbers illustrate that putting your cash savings in an Isa is worth the effort, even if the initial savings aren’t that exciting – it’s about taking a longer term view.

l Andrew Hagger is head of communications at Moneynet.co.uk