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Fixed rate bonds vs fixed rate ISAs

Category: ISAs
Author: Nigel Woollsey
Updated: 13/02/2019

At a glance

  • Fixed rate bonds consistently pay greater interest rates than their equivalent term ISAs.
  • Remember the annual tax-free limit of £1,000 for lower-rate taxpayers and £500 for higher-rate tax payers on interest earned – ISAs may be a better option if you exceed these.
  • Sharia and challenger banks have fuelled bond market competition.

In this guide, we look back at the rates paid in the fixed rate ISA market since 2016, discuss some of the key changes in the market that have impacted rates and give an overview of why fixed rate cash ISA and fixed rate bond rates are different.

Comparing ISA and fixed rate bond best buy rates

In February 2016, the Bank of England base rate stood at 0.5%. The Best Buy rates for fixed rate bonds were in excess of fixed rate cash ISAs, by between 0.25% and 0.78% (depending on the term).

One year later and the Bank of England base rate declined to 0.25%, with both cash ISA and fixed rate bonds seeing reductions in rates. In addition, from April 2016, the Personal Savings Allowance (PSA) came into effect. This allowed basic rate taxpayers to earn up to £1,000 in savings income tax-free annually and up to £500 for higher-rate tax payers. For some savers, this now meant they could now save using other types of savings accounts in addition or instead of ISAs and still be tax efficient.

This legislation, combined with new competition from challenger banks in the bond market, saw demand for ISAs cool. However, between February 2016 and February 2017, two and five-year fixed bond rates dropped more significantly than their ISA equivalents. Despite this, fixed rate ISAs still offered less competitive rates than their comparable bonds.

Please note, Al Rayan Bank pays an expected profit rate as it is an Islamic bank.

Are ISA best buy rates increasing in 2019?

Two years later, and following a base rate increase to 0.75%, Best Buy rates for both account types has increased by between 0.64%-0.8%. However, the difference in one-year rates between fixed rate cash ISAs and bonds for equivalent terms has broadened since 2016. Interestingly, in February 2019, the greatest difference between ISA and non-ISA fixed rates can be found for two-year terms, which is 0.08% greater than the difference between the rates of one-year products.

Please note, Al Rayan Bank pays an expected profit rate as it is an Islamic bank. Source:

So why do fixed rate cash ISAs pay less interest than their equivalent fixed rate bonds?

It starts with a legacy that originally ISAs were an easy, tax-efficient way to save. Providers could therefore offer lower rates in exchange for savers wanting this benefit. After the PSA changes in April 2016, this benefit for ISAs was reduced but rates never equalised with fixed rate bonds. This may be because providers often have greater administration with ISAs (such as HMRC reporting).

But, the likeliest factor is probably the impact of new entrants into the fixed rate bond market from the challenger bank and sharia banking sectors, which in turn is fuelling competition and rates.

Top tip:

"If you want the interest you earn on your savings pot to be the highest possible, and you are not at risk of reaching the PSA allowance limit, then a fixed rate bond will likely pay a greater rate of interest."

How do I compare fixed rate bonds and ISAs?

It's easy to compare fixed rate bonds and ISAs – find the Best Buys by searching our tables.

Note – products listed are shown as their interest rates at the time. Non-ISAs are any savings products outside of an ISA wrapper, in the examples shown fixed rate bonds. All rates shown are for a minimum £10,000 balance and are gross.

Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.