Isas have fallen out of favour with savers since the introduction of the personal savings allowance, according to research by Moneyfacts.
The latest research from Moneyfacts highlighted a stark difference between the returns that can be gained on cash Isas and those on non-Isas.
It has found that despite rates improving from a year ago thanks to last November's base rate increase, the average Isa rate is 1.18 per cent, which means it has fallen by around a third since 2013 when it was 1.74 per cent.
The best Non-Isa one-year fixed rate available, according to Moneyfacts is from Gatehouse Bank at 2 per cent, compared with 1.6 per cent from Al Rayan Bank.
Since the introduction of the personal savings allowance (PSA), clearly Isa returns are failing to entice savers who are increasingly putting their cash elsewhere.
On 6 April 2016 the new personal savings allowance was introduced and the payment of tax on the interest from bank and building society accounts under the tax deduction scheme for interest (TDSI) ceased.
Interest payments are now paid net of the basic rate of tax.
| Non-ISA | Return after one year on £20,000 | ISA | Return after one year on £20,000 | Difference over one year | |
| Best one-year fixed rate | Gatehouse Bank 2.00% | £400.00 | Al Rayan Bank 1.60% | £320.00 | -£80 |
| Best two-year fixed rate | Secure Trust Bank 2.12% | £424.00 | Al Rayan Bank 1.80% | £360.00 | -£64 |
| Best five-year fixed rate | Secure Trust Bank 2.66% | £532.00 | Shawbrook Bank 2.30% | £460.00 | -£72 |
Rachel Springall, finance expert at Moneyfacts, said: "The influence of the PSA continues to dampen the popularity of Isas, so it is little wonder that subscriptions are falling.
"The amount of money placed into Isas is also on the downturn, according to HM Revenue & Customs, which indicates that low cash rates could be putting off new savers.
"Some steps have been put in place to make Isas more appealing, such as a large increase in the Isa allowance to £20,000 and a new rule allowing money taken out of an Isa to be replaced during the same tax year without consequences.
"Help to Buy Isas, Junior Isas, Innovative Finance Isas and most recently the Lifetime Isa are also now around to appeal to different types of savers, while people are using stocks and shares Isas more too."
She added that savers who have stuck to Isas will largely be able to move their older pots to take advantage of better rates, as according to its data 90 per cent of Cash Isas today allow transfers in from other Cash Isas.
She said: "While all these perks are clearly useful, the interest rates on Cash Isas are still falling short of their non-Isa counterparts, which may be why the number of subscriptions to Cash Isas fell by 1.6 million between the 2015 to 2016 and 2016 to 2017 tax years."
Claire Walsh, chartered financial planner at Aspect 8, said: "Since the introduction of the PSA the vast majority of people will not pay any tax on cash savings.
"Where someone's interest would fall within the PSA the priority should be getting the best rate and account for their circumstances.
"Where people are wanting to invest it makes more sense to use Isa allowance for investments where one would how to get better returns than cash interest rates in any case and shelter this from tax."
This comes after HMRC recently released statistics showing a decline in Isa subscriptions just one year after the PSA was introduced in 2016.
aamina.zafar@ft.com
