Prudential and unbiased.co.ukreveal that as a nation we are set to waste up to £1.3 billion this year through the failure to use all the available tax-free ISA allowances.
Research carried out for the TaxAction 2015 report shows that the biggest culprit is unused allowances for cash ISAs, which could account for up to £1.2 billion of the total amount wasted. The calculation is based on an additional 55 million ISAs that could be opened under the current eligibility criteria, and the additional interest that could be generated compared to a standard instant access savings account.
Alongside cash ISA wastage, UK taxpayers could be losing an additional £104 million by not using stocks and shares ISAs properly.1 The research estimates that 1 million UK households are holding eligible stocks and shares outside of an ISA, attracting tax liabilities, rather than taking advantage of their tax free allowances. 2
A further £2.4 million of waste comes from not using Junior ISAs. These were introduced in November 2011 to replace the Child Trust Fund (CTF)3, yet there are still over seven million under-18s without any tax-free savings account (Junior cash ISAs) or CTFs in their name. Assuming the same rate of savings activity as for existing CTF accounts, these additional accounts could generate tax efficient savings of £435 million. At the basic rate of tax for Junior ISAs, this means a potential tax saving of £2.4 million.
ISA tax waste summary at a glance –
Prudential and unbiased.co.uk are urging consumers to take action on tax. Savers should review their current arrangements and use as much as they can of their ISA allowances by the 2014/2015 deadline of 5th April 2015. Under current rules, consumers can save up to £15,000 in any combination of cash ISA and stocks and shares ISA.
Les Cameron, tax specialist at Prudential, comments:
“ISAs are generally regarded as the first step in financial planning. They’re a fairly simple way to protect up to £15,000 of your savings a year from unnecessary taxation.
“While ISAs may be perceived as relatively simple products, financial advice is important to fully understand the range of investments available within the ISA wrapper – from stocks and shares, to gilts to cash to life policies.
“Independent financial advisers can guide investors through the process of making the investment and tax choices that best suit their own individual circumstances.”
Karen Barrett, chief executive of unbiased.co.uk comments:
“Our research shows that £4.9 billion is set to be wasted in overall tax inefficiencies this year, £200 million more than last year, with ISA waste making up a large share of this. Moving your money into tax-efficient ISA accounts is a simple way to make your savings work as hard as possible for you. After the £15,000 super ISA allowance was announced 59% of unbiased.co.uk consumers polled stated they planned on taking full advantage of the limit.4 Although you may not be able to set aside the full amount each year, making sure you are not paying unnecessary tax on your savings will go a long way. After all, if you consider how much you could build up in ISAs after 5 or 10 years you start to realise the real benefit of having protected your savings in the most tax efficient way possible.
“If you are unsure about the best way to begin, or if you think investing is ‘not for you’, a professional financial adviser can help you explore all your options. An adviser can explain to you how to get started, and also look at your overall tax position and make sure your finances are working for you as hard as they could be.“
Consumers can take advantage of the unbiased.co.uk free investment check today, and take a first step towards getting expert savings advice. For a free and confidential search for a financial adviser or accountant, go to www.unbiased.co.uk.
1 In reality, this tax wastage could be higher or lower dependent on a number of factors including the tax status of the investor and the extent to which the returns from the ISA are constituted by dividends, interest or capital gains.
2 Out of a total of 26.4 million households in the UK it is estimated that 4.0 million are holding shares (15% according to the Department for Work and Pensions, 2014). Currently, 3.0 million stocks and shares ISAs have been opened, with a total amount subscribed of £18.4 billion – giving an average amount subscribed of £6,167 per household. On the assumption that each of those stocks and shares ISAs opened could be attributed to a single household then if each of the remaining 1.0 million shareholding UK households invested the average amount into a stocks and shares ISA, it would add up to £6.0 billion. An average return of 8.7% (Compound annual growth rate of the year-on-year performance – total return, FTSE All-Share index, 2004-2013) on the £6.0 billion would generate £522 million. Investing this £6.0 billion in tax-free stocks and shares ISAs would result in saving the deduction of basic rate income tax at 20% on £522 million (of £104 million). This is based on the assumption that investments in the stocks and shares ISA are exclusively in interest- bearing investments, such as corporate bonds, furthermore are owned exclusively by basic rate taxpayers. No such saving would be made in respect of equity dividends but tax savings would be greater in all cases for higher and additional rate taxpayers.
4 unbiased.co.uk poll 28th April 2014 to 15th Jan 2015, 231 respondents
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