Over two million fixed rate savings accounts containing balances of over £20,000 could generate higher returns by switching a portion of the deposit into ISAs on maturity, analysis by Paragon Bank has indicated.

The bank said this would still be the case even if the ISA rate was lower.

Paragon’s analysis of data from CACI showed there were 2.3 million fixed rate non-ISA adult savings accounts earning 2.5% interest in May, containing £20,000 or above. Approximately 70% of fixed rate non-ISA savings accounts are due to mature over the next 12 months, the majority of which are held in one-year fixed-rate accounts.

A non-ISA account with a £20,000 balance earning 2.5% would generate interest of £500, resulting in any interest earned on top of that incurring income tax at 40% for higher-rate taxpayers.

Paragon highlighted that even though rates offered on maturity on non-ISA fixed rate accounts may be higher than those available through cash ISAs, the tax charge often means that the tax-free ISA delivers better returns for higher-rate taxpayers with large balances.

“Fixed rate savers can be tempted by the better rates on offer on non-ISA accounts on maturity, but for those higher-rate taxpayers, an ISA variant can deliver a more favourable return,” commented Paragon managing director of savings, Derek Sprawling. “Ensuring you utilise your full £20,000 ISA allowance is sensible financial management for this cohort of saver.

“The driver is tax. As savings rates and balances have risen since the onset of the pandemic, more savers are paying tax on their savings interest. By switching to an ISA, not only can higher-rate taxpayers generally generate better returns, the cash held within the ISA wrapper is also free from tax in perpetuity.”

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