Want to avoid paying £73k in tax?

Savers could be earning a massive £73,611 extra over a lifetime if their savings were invested in a tax efficient Individual Savings Account (ISA) – a figure which would double for high-rate tax payers, according to research from Alliance & Leicester Savings.

Three quarters (75%) of Brits have savings and/or investments – but 43% of them are losing out on the extra financial benefits of an ISA. In total this tax year, people are collectively losing out on a potential £425,700,000 boost to their savings.

Not surprisingly, savers cite a good rate of interest as the most important factor when choosing a savings account, with eight out of ten (84%) saying this is a key factor. Less than half this number (40%) identify not paying tax on their savings as an important consideration. Yet 20% in tax (this is doubled to 40% for high-rate tax payers) is automatically deducted from all non-ISA savings accounts – reducing the actual interest rate on an account paying 5% to just 4%, making the rate far less competitive than savers might think.

The extra saving in tax offered by a cash ISA really adds up over the years - the modest £30 a year tax saving would have totalled over £1,000 in the eight years since cash ISAs were first introduced in 1999.

Ross Dalzell, Manager for Savings at Alliance & Leicester said: “It is amazing that after all the recent media attention on ISAs that many of the myths and misunderstandings surrounding them are yet to be dispelled for a high proportion of the population. ISAs are after all, just as straightforward to set up and manage as any other savings account.”

“Piggybank” mentality

Worryingly nine per cent of us still keep our extra money in cash. The younger generation seem unable to shift the “piggybank” mentality with 15% of 18-29 year olds holding on to hard cash instead of making the most of the savings accounts available to them.

Lack of understanding

Some people are still being put off mini cash ISAs for basic reasons. When questioned, 14% of those without a mini cash ISA said they just don’t know what one is and five per cent were clueless about where they could get one from. A further five per cent believe the ISA system is too complicated to understand.

The following reasons were also highlighted:

One in six (16%) don’t think they have enough money to open or save in a mini cash ISA – yet you can open one with as little as £1.
Five per cent don’t think they’d have immediate access to their money – yet many mini cash ISAs allow instant access to your funds.

Dalzell continues: “The key reasons people gave for not having opened a cash mini ISA are all surmountable – in the main you can open one with as little as £1 and the balance is available for withdrawal at any time. It is also concerning that so many young people are holding on to cash savings. It’s possible to open a cash ISA from the age of 16, so it’s best to get into the savings habit early! I would encourage anyone who doesn’t already have one to start taking advantage of the tax benefits available.

“ISAs are more flexible than people realise and opening a mini cash ISA really is simple, as 81% of people we surveyed agreed. If your hard earned cash is currently sitting in a savings account or an ISA paying a poor rate of interest, make sure you shop around, to ensure you are getting the best deal available.”

Alliance & Leicester’s new Premier ISA account pays 8.10% pa gross/AER, and is available to customers opening an Alliance & Leicester Premier Current Account. Customers can apply by calling 0845 300 2887, visiting their local branch or going online at alliance-leicester.co.uk.

Dalzell concludes: “To beat Alliance & Leicester’s 8.10% ISA offer, customers would need to find a non-ISA account that pays more than 10%, or a regular savings account paying more than 18% - even higher for high rate tax payers!”

Alliance & Leicester has also recently launched its Direct ISA Issue 3 paying 5.40% pa gross/AER for all customers looking to invest in an ISA, which is not linked to one of the bank’s current accounts.