Fixed Rate Bonds offering best returns

Savers that are prepared to lock their savings away have exposure to the best interest rates on savings accounts for over a year, ahead of isas and other savings vehicles, according to financial information company Moneyfacts.

The firm said that the interest rates available on fixed rate bonds with relatively short terms have been on the rise since August 2010.

However, we can't ignore the fact that they have been increasing from an all-time low as a result of the recession which helped to bring the Bank of England base rate down to the lowest level ever recorded – 0.5%.

The movement suggests the Bank rate will rise in the coming months.

According to Moneyfacts, the average one-year fixed rate bond currently pays 2.85%, marking the highest level since March 2010.

Savers looking for higher rates could consider a two-year bond, which will currently get you an average of 3.42%. Push your term out further to three years and you can expect to get an average return of 3.7%, and for the highest rates - five years with an average interest rate of 4.17%.

Michelle Slade, of Moneyfacts said that the most significant increase to rates is on short-term bonds, which are currently the most popular amongst savers.

However, she added that savers could face hefty penalties if were to withdraw from their funds before the term expires, so they should consider all other savings account options before committing.

UK ISA allowance increased to £10,680

 The individual savings account allowance has been raised in line with inflation, pushing it up to £10,680 per year.

This is great news for savers as it means that people in the UK can now avoid paying income tax on returns from savings accounts and stocks and shares amounting to £10,680.

All standard savings accounts require account-holders to pay a rate of income tax depending on their annual income.

The income tax rates are as follows: Earning of between £0-£2,560 per year must pay 10%; £2,560-£35,000 will incur a 20% tax rate; £35,000 - £150,000 will incur a 40% rate while anyone earning over £150,000 will pay 50% of whatever they earn as income tax.

Savers can put up to £5,340 each year into cash ISAs and the remaining allowance into stocks and shares ISAs; up to the full amount into stocks and shares ISAs or a combination of the two.

The ISA allowance has seen several increases in recent years, the most recent of which was pushed up from £7,200 to £10,200 to all savers aged 50 and above from October 2009 and to everyone else from the beginning of the last tax year in April 2010.

Those that are willing to take on a bit of risk in exchange for the potential to earn higher returns than the interest paid on saving accounts should consider share dealing accounts that incorporate the ISA wrapper.

These accounts are offered by many banks and provide a platform to buy and sell shares online from the comfort of your own home.

All returns made from these accounts are tax free, so you can make your investments work harder for you and avoid having to pass on a cut to the tax man.