Savers looking to store some cash in a short-term Isa have been given a boost as the average one-year fixed rate is now at its highest levels in nearly three years, according to a website.
The average one-year fixed Isa rate on the market in January stands at 1.35% – the highest level since February 2016, Moneyfacts.co.uk reported.
The figures are based on an investment of £5,000.
The findings may give some encouragement to people looking to use their Isa allowance as a new tax year approaches in April.
The annual Isa allowance is £20,000.
Isas are a tax efficient way to save money, but the introduction of the personal savings allowance in 2016 means many savers have found their cash can also now be held in non-Isa accounts and they will still pay no tax on the interest – weakening the appeal of Isas.
The personal savings allowance means basic rate taxpayers can earn up to £1,000 in savings income tax free, while higher rate taxpayers can earn up to £500.
Traditionally, the period around the new tax year saw Isa providers competing hard for savers’ cash by launching attractive rates, but interest has waned amid years of low interest rates plus the introduction of the personal savings allowance.
Darren Cook, of Moneyfacts, said: “With the Isa season fast approaching, savers must be hoping to witness a little more of the remnants of a true Isa season of the past, with competition among providers seemingly increasing, as rates in the short-term savings market continue to rise – albeit marginally.
“In the past, one-year fixed Isas seem to have been favoured among savers, allowing them to revisit their investments and look at fresh options at the start of each Isa season.
“Our research suggests providers may already be responding to this trend as the average one-year Isa rate reached its highest level since February 2016 to stand at 1.35% this month.”
Mr Cook said that after the personal savings allowance was introduced, Isa rates generally have been typically lower than those offered by standard fixed-rate bonds.
But he said Isas still have their advantages, and continued: “Despite interest rates on Isas seeming relatively low and with most UK taxpayers able to earn up to £1,000 of income from savings tax-free, savers should still not lose sight that an Isa allowance will be ring-fenced in years to come when interest rates may look a little different to what they do today and (the personal savings allowance) could fluctuate.”