The Government-backed bank has hiked the rate paid on the account from 2.15% AER to 2.40% AER.

More than 333,000 ISA holders will benefit from the interest rate increase, the second time in 2023 in which the rate paid on the Direct ISA has been increased.

The move follows previous increases to the returns on offer from other savings accounts offered by NS&I. For example, from March, the prize rate on Premium Bonds was increased to 3.3%, the fifth hike to take place in a year.

‘Playing catch up’

Sarah Coles, head of personal finance at Hargreaves Lansdown, said that the Direct ISA was “playing catch up” as it still trails significantly behind the rest of the market.

In fact, it is even behind the regular easy access account offered by NS&I, which pays a rate of 2.85%.

Coles continued: “This isn’t a huge surprise. NS&I doesn’t want to set a blistering pace way out in front of the rest of the pack. It wants to be tucked somewhere in the middle, so it balances the needs of savers and taxpayers. However, at this rate, better accounts are leaving it in the dust.”

Coles did note that there are other appeals to saving with NS&I beyond simply the interest rate, namely the fact that the entirety of your savings pot is protected. This isn’t the case with other banking institutions, where only the first £85,000 held is protected.

If you are looking to get the most out of your savings, check out YourMoney.com‘s guide to this week’s top easy access, fixed rate and notice ISAs.