Tax-Free savings: Hunting for the best interest rates

Faith Glasgow on where to go for the top-paying accounts

Most of us need a stash of cash, in the shape of a deposit account, to fall back on for treats and emergencies.

Interest rates have dwindled steadily, however. Indeed, with rates hovering around 5.5 per cent before tax (Bristol & West's Easy Access Plus,at 6.20 per cent, is the best of the bunch), it makes a lot of sense to tuck away as much as you can in a tax-free account.

Until 5 April, the obvious choice was a Tessa account. New Tessas are no longer available but the capital (though not the interest) in maturing Tessas can be reinvested within six months after it matures in a Tessa- only ISA.

In the current year, only pounds 3,000 can be invested in a cash-only ISA, so for any CAT-marked product (complying with government guidelines on Charges, Access and Terms) you can keep the account running indefinitely and withdraw money without penalty.

However, while CAT-standard plans are more easily comparable, you'll find a wider range of non-CAT-standard products, including notice accounts, fixed terms and fixed rates.

Keep an eye out, though, for headline rates artificially boosted by initial bonuses. For example, Skipton Building Society pays 6.6 per cent, but that includes a 0.5 per cent bonus that will cease from 5 January next year.

The current best rate of 6.5 per cent on CAT-standard cash ISAs comes from Nationwide on deposits from pounds 1 upwards; Alliance & Leicester and Halifax offer the same rate, but only on the full pounds 3,000 allowance. The top rate is a non-CAT-marked account from Norwich & Peterborough, paying 6.75 per cent on a minimum investment of pounds 3,000 (pounds 1,000 for existing customers).

Once you've used up your pounds 3,000 ISA allowance, the other obvious tax shelter for deposits is National Savings, the government's own range of savings opportunities, several of which are tax-free. Indeed, National Savings has added to its menu with a CAT-standard mini cash ISA, offering 5.75 per cent. It is not the best rate but it is backed by the UK Treasury.

The index-linked saving certificate is a five-year investment paying 1.65 per cent over inflation (currently 2.4 per cent), a total of 4.05 per cent per year tax-free. That equates to 6.25 per cent gross for higher rate taxpayers.

Children's Bonus Bonds, which can be bought for children up to the age of 16, are a useful way for parents to put aside money at a fixed rate. The current annual rate amounts to 4.65 per cent if the bond is held to maturity.