Don’t let the taxman raid your savings

With just two months to go until the end of the current tax year, a new poll from  MoneySupermarket has found that more than a third of people in the UK haven't made the most of tax-free savings with an ISA this year, and eight per cent simply won't bother. A cash ISA is a savings account where the interest you make on your savings is tax-free.

The poll found that there were a range of reasons people had not yet taken out an ISA. Confusion about how ISAs work seems to be playing a part, with six per cent not knowing what their tax-free allowance is and a further five per cent not understanding how to use an ISA. Eight per cent have stated that they simply won't bother using their ISA allowance this year.  However, one in seven (15 per cent) still aim to save into an ISA before the current tax year ends on April 5th, but have not used their full allowance yet. Showing that money is tight for many, the site poll also found a fifth (17 per cent) say they can't afford to save at the moment.

Kevin Mountford, head of banking at MoneySupermarket, said: "People who are in a position to be able to save at the moment need to do everything in their power to maximise their savings pots. If they are taxpayers, they should use as much of their ISA allowance as they can afford to make sure that the interest they earn on their hard-earned savings is not unnecessarily lost to taxation. Historically, we have witnessed some savers waiting until the end of the tax year for potential last minute rates from providers, but this means they could miss out on additional interest on savings in the meantime.

"ISAs are not as complicated as they may first seem, and there are a range of simple and helpful guides available to help people understand how to make the most of tax-free savings. MoneySupermarket will have an online ‘ISA hub' available from this week, which has all households need to know about saving money with ISAs.

"Some households may find they're not currently in a position where they can save regularly. There are some things that you can do to try and free up cash for the family budget and take a step towards being able to save in the future. Try and take some time to review all of your major household bills, especially your energy and your insurance arrangements. If you've never switched these, you'll find that you can save hundreds of pounds. If you're not able to save now, but you have savings from previous years in old bank accounts, it is still worth opening an ISA and moving your money. You're likely to get a better rate of interest, and the interest you earn will be protected from the taxman. The maximum cash ISA allowance is £5,640 for this tax year, increasing to £5,760 from April 6, 2013."

The poll also found 38 per cent have already used their cash ISA allowance this year. However those with ISA bonus rates due to expire should avoid remaining on low rates and shop around to maximise savings income. For example someone with £5,640 in an easy access ISA with a bonus rate about to expire, such as the Santander Flexible ISA Issue 4 which offered 2.81 per cent on opening, could find their rate drop to 0.50 per cent once the term is up. By switching to the current market leader Cheshire Building Society's ISA Saver offering 2.00 per cent, savers could boost their returns significantly by £84.60 in a year.

Kevin Mountford continued: "If you are a UK taxpayer, then opening a cash ISA to take advantage of your tax free allowance is a no brainer. Likewise, if you have savings in ISAs you have opened in previous years, then it is worthwhile checking the rates being paid, as you could be on an un-competitively low rate. Switching an existing ISA balance to a market leading deal which allows transfers in, can help maximise your savings pot. However, make sure you follow the official ISA switching rules otherwise your savings will lose their tax-free status."

For more information, visit moneysupermarket.com.