Savers set to lose out on £403 million by not being ISA efficient

19 Mar 2012

  • Brits to waste £376 million by failing to make the most of their cash ISA allowance
  • A further £27 million could be lost through not utilising a stocks and shares ISA
  • Less than a month for savers to set up or top up their ISA for this year

Unbiased.co.uk’s annual Tax Action Report1 reveals that savers will lose out on as much as £403 million1 this year by failing to put their savings and investments into tax-efficient savings accounts.  At a time when we have passed the third anniversary of the 0.5% base rate and savings rates continue to be low, people are still losing millions by not making the most of tax-efficient wrappers, such as ISAs, and are instead investing their money in accounts and investments where the income generated is taxable. 

Cash ISA

Unbiased.co.uk’s research shows that savers could be losing out on £376 million of extra money by not making use of cash ISAs this year.  The research is based on an extra 42 million ISAs that could be opened using current eligibility criteria and the additional interest generated by a cash ISA compared to a standard deposit account.2  

The £376 million potential extra money includes £81 million estimated tax payable on interest earned, which could be avoided by utilising ISAs.

Stocks and shares ISA

But taxpayers are also missing out on the tax breaks available with stocks and shares ISAs - 987,000 UK households3 hold stocks and shares outside an ISA at the moment.  If they converted this into the average stocks and shares ISA investment of £4,606 per household, the additional tax benefit could amount to £27 million, if the investors were all basic rate taxpayers  and the stocks and shares ISA investments were all interest-bearing investments, like corporate bonds, where the interest is tax-free4.

5 April 2012 is the deadline to make the most of this year’s ISA allowance: the annual limit for this tax year is a total of £10,680, of which a maximum of £5,340 can be put into a cash ISA.  After this date, any unused 2011/2012 ISA allowance will be lost.  From the new tax year, which starts on 6 April 2012, savers can invest £11,280 in an ISA of which £5,640 can be in cash.

Karen Barrett, Chief Executive of unbiased.co.uk, comments, “Even if you only have a little to put aside, saving a small amount regularly each month in a tax-efficient savings account can make a real difference over the long term.  It is important for people to ensure they are making their savings work as hard as possible.  By putting some basic tax planning in place, such as investing in an ISA rather than a standard savings account, they could optimise their savings without having to do very much. Each new tax year means another opportunity to save tax-free.  Our research shows that with over £400 million set to be wasted this year, there are still far too many people who are not saving in a tax-efficient way. 

“Investing in stocks and shares doesn’t have to be daunting – if you are doing it for the first time then why not take advice to ensure you are choosing the right savings options for you?  An independent financial adviser can look at your finances as a whole and choose the best product and provider for your individual circumstances from all the products available.  To find a local IFA visit unbiased.co.uk and use our free and confidential ‘find an IFA’ search.”

ENDS

1. Tax Action Report 2012 has been produced by Opinium Research on behalf of unbiased.co.uk. All figures are based on calculations done on unrounded values to guarantee accuracy; text paragraphs display rounded figures whereas unrounded figures are shown in footnotes below

2. If these 42 million account holders invested the average ISA savings amount of £3,190 into an ISA then a total of £134.2 billion would be invested. If we assume that  this  £134.2 billion is currently held in normal cash deposit accounts accumulating interest at the average high street deposit account interest rate of only 0.30%, were it to be held in  cash ISAs it would generate interest at the average rate of 0.52 per cent instead.  Based on these assumptions, the overall amount of £134.2 billion would therefore generate £402.7 million of interest in standard deposit accounts compared to £697.9 million of interest in ISAs. The basic income tax at 20% paid on standard account deposits further reduces the net interest generated to £322.2 million (£402.7 million minus £80.5 million tax at 20%). Therefore the difference between the (tax free) ISA interest of £697.9 million and the (taxed) standard deposit account interest of £322.2 million is tax wastage of £375.7 million. This difference is based on the assumption that all the investors are basic rate taxpayers. Tax deducted on interest earned by non-taxpayers could be reclaimed, but more tax would be payable on the interest from ordinary (non-ISA) deposit accounts by higher and additional rate taxpayers

3 Out of a total of 26 million households in the UK 4.4 million are holding shares. Currently, 3.43 million stocks and shares ISA have been opened, with a total amount subscribed of £15.8 billion – giving an average amount subscribed of £4,606 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 987,000 shareholding  UK households invested  the average amount into a stocks and shares ISA, it would add up to £4.54 billion. An average yield of 2.96% generates a return of £134.4 million on the potential £4.54 billion. By investing this £4.54 billion in tax-free stocks and shares ISAs that invest exclusively in interest- bearing investments, such as corporate bonds, and are owned exclusively by basic rate taxpayers would result in saving the deduction of basic rate income tax at 20% on £134.4m. 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 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

For more information contact:

Lisa Grando/ Emily Falla/ Maddy Morgan Williams, Lansons Communications:  020 7294 3682

For expert commentary or case studies from over 190 media-friendly IFAs, journalists should visit www.unbiased.co.uk/bluebook.

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About unbiased.co.uk, the professional advice website

The unbiased.co.uk portal is a free and confidential UK-wide search matching consumers with local professional advisers: ‘find an IFA’, ‘find a mortgage adviser’, ‘find a solicitor’, and ‘find an accountant’. These searches enable consumers to find professional advisers by postcode, area of specialism, qualification and payment method. In 2011, unbiased.co.uk fulfilled around 450,000 searches for local, professional advice. 

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Category: Tax action Tagged: ISAs, Investments, Savings


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