How to squeeze the most out of your tax-free savings for another year

From April next year, you’ll be able to earn £1,000 of interest on your savings without the tax man taking a slice (£500 if you’re a higher rate taxpayer). But until then an Individual Savings Account (ISA) is still your best tax-efficient savings option because you don’t pay tax on any of your returns.

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So how about a market-leading one-year fixed ISA paying 1.65% AER? Well, that’s what Virgin Money is offering.

Here’s all you need to know…

What’s the deal?

The Virgin Money Fixed Rate Cash E-ISA pays 1.65% AER, tax-free, fixed until April 24, 2016.

You can open the account with just £1 and there’s no upper balance limit, which is great because it accepts transfers in from previous ISAs.

The account is online access only, and you can choose to have your interest paid monthly, or in a lump sum at the end of the year. Finally, if you want to withdraw your cash, there’s no notice period.

Who’s it good for?

If you’re a taxpayer with money you want to put away in savings, and you haven’t yet maxed out your full ISA allowance for the year, this is this top-paying one-year fixed rate ISA, so it’s worth your attention.

It’s also good if you have a more modest amount of cash to put into savings, because the minimum deposit is only £1.

If, however, you’re likely to want to spend some or all of your savings during the fixed period, this might not be the best account for you because there’s a penalty for making withdrawals – more on that in a moment.

Any catches?

First of all, this account is ‘limited issue’ – which means Virgin Money is only selling a certain number of them. If you don’t act fast, you might miss your chance to get one.

Next up: that withdrawal penalty. If you make a withdrawal within the 12-month term of the account, you’ll be charged the equivalent of the interest you’d earn in 60 days.

For example, if you use your full £15,000 ISA allowance, and then withdraw £1,000, you’ll miss out on 60 days’ worth of interest which, at 1.65% AER, works out as roughly £41. You’ll find this same penalty on lots of other fixed rate cash ISAs though, so it’s not a particularly bad example.

What’s the verdict?

If you only want to tie your savings up for a relatively short period, this is the best rate you’ll find on a one-year fixed rate account without too many strings attached.

Bank of Cyprus pays the same rate on its Loyalty Fixed Rate Cash ISA, but only its existing customers can get the account. You also have to pay in at least £500 to open the account.

The next closest deal after that comes from the Post Office, paying 1.55% AER fixed for 12 months, but you can’t make withdrawals, nor can you manage the account online and you’ll have to deposit at least £500 to get started.

Top tip

From April 2016, basic rate taxpayers will be able to earn up to £1,000 of savings interest without paying the usual 20% tax on it – we explain the ins and outs of all this here.

It’s great news for 95% of us who won’t have to pay any tax at all on our savings income, but in the meantime an ISA really should be your first port of call for savings.

Don’t put a single penny in a taxable savings account until you’ve completely maxed out your £15,000 ISA allowance.

Please note: any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct.

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