The charity bank account that could be a cash ISA alternative – and if it’s worth it ...Middle East

A savings account where your money is used to support charities and social enterprises could be an alternative way to shield yourself from large tax bills, especially when cash ISA limits are cut in 2027.

Charity Bank’s Community Investment Tax Relief (CITR) base rate tracker account offers a low interest rate compared to top savings accounts on the market, but the main benefit is the opportunity to get tax relief on your savings – even if you have used up your ISA allowance.

People can put £20,000 in ISAs each year across either cash or stocks and shares. However, from 2027, the cash allowance will be reduced to £12,000 for anyone under 65.

Money held in cash savings outside of ISAs is subject to income tax once you use up your tax-free allowance.

Basic rate tax-payers get a £1,000 savings allowance, after which they owe 20 per cent tax; higher rate payers get £500, after which they pay 40 per cent; and additional rate payers get no allowance, owing 45 per cent interest on all savings interest income.

Although you pay tax as you would on normal savings with the Charity Bank account, it offers separate tax relief, which can be particularly lucrative for high earners or people who have used up their ISA allowance.

The account is a little complex, so here’s a full run down on how it works and whether it’s a good option for you.

What is CITR?

The CITR scheme encourages investment in disadvantaged communities in exchange for offering tax relief to investors.

There are 33 account providers who are accredited to use CITR, but most of these offer investment opportunities rather than savings accounts.

Charity Bank is currently the only accredited provider offering a savings account, with the benefit of full protection on your cash up to the value of £120,000 – the Financial Services Compensation Scheme (FSCS) limit.

How does the account work?

To open an account, you need to deposit at least £5,000. The bank then pays you an interest rate that is 3.25 per cent below whatever the Bank of England’s base rate is. If the base rate drops below 3.25 per cent, it pays no interest at all.

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With the base rate currently at 3.75 per cent, this means the account pays an interest rate of just 0.5 per cent. If you deposited £20,000, you would make £100 in interest in one year.

This is well below the best savings accounts on the market, which currently pay more than 4 per cent.

However, the tax relief element of the account if what makes it worth considering, particularly for people who have maxed out other tax-free savings options, like an ISA.

Three quarters of the money you put into a CITR account is eligible for tax relief at a rate of 5 per cent.

So, if you put £20,000 in, £15,000 of that would be eligible for 5 per cent tax relief. That equates to £750.

You can claim back the tax back by filling out a self-assessment tax return, lowering your overall income tax bill.

Andrew Hagger, founder of Moneycomms, said: “While the interest rate is very low, the 5 per cent tax benefit on three quarters of your balance is a worthwhile benefit and could prove popular if this savings vehicle is still available when the £12,000 cash ISA limit comes into force.”

You can only start withdrawing cash from the account in the fourth year after it is opened, at which point you can take out 25 per cent of the total deposit. In year five, you can take out 50 per cent, and after this you can take all of it out.

Your money is protected up to the value of £120,000 by the FSCS in the event that the account provider went bust.

Who is the account best for?

There are several things to consider before opening an account.

First, you should only consider opening the account if you can keep your money locked away and you don’t need it. You won’t be able to access any of your money until the fourth year it is open, so don’t save cash you will want before then.

The account is also generally better for higher earners with a lot of money to save because of the tax relief on offer.

For example, if you are a basic rate taxpayer with £5,000 to save, you would get just £25 in interest over a year from the account, and you would be eligible to claim £187.50 in tax relief – an overall return of £212.50.

But if you saved that money in a cash ISA paying 4.28 per cent interest – the best on the market – you’d make £214, which is a slightly better return.

The account comes into its own if you have much larger amounts to save, particularly if you are a higher or additional rate tax payer who has already used up your ISA allowance.

For example, if you have £100,000 to save, earn more than £125,000 a year, and have already used your ISA allowance.

In the Charity Bank account, your £100,000 would gain £500 in interest, which would be taxed at the additional rate of 45 per cent, leaving you with £275.

But with the 5 per cent tax relief on three quarters of the balance, this would be 5 per cent of £75,000 in the first year, which is £3,750. Overall, you have effectively made £4,025.

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The top paying easy-access savings account from Chase pays 4.5 per cent currently. If you deposited £100,000 in that, you would make £4,500, but you would then get taxed at 45 per cent on that cash, leaving you with £2,475 – much lower than in the CITR.

An alternative would be to invest your money into the stock market, which has historically seen higher returns than money held in cash – but with investing, returns are not guaranteed and you could get back less than you invested.

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