Savers pay £13bn extra tax

The failure of UK savers to use their full ISA allowance could have cost them an estimated £13 billion, according to research by Clydesdale & Yorkshire Banks.  Since the launch of ISAs in 1999, savers have invested approximately only one sixth of what they potentially could in ISAs, meaning millions have been paying tax on their returns unnecessarily.

Clydesdale and Yorkshire Banks estimate that the total ISA allowance, available to taxpayers since its launch in 1999, is approximately £2,305 billion.  However, it's estimated that by the end of this tax year (5th April 2010) only £350 billion will have been invested in ISAs in total, around 15% of the tax-free saving available. 

Taxed returns

Savings and investments made outside ISAs will incur tax on any returns made.  The tax-free status of ISAs has allowed investments of £7,000 annually (£7,200 since April 2008 and £10,200 since October 2009 for Over 50s) since April 1999.   With approximately almost 30 million UK taxpayers, potentially £2,305 billion could have been invested since 1999.

With the majority of taxpayers having a 20% tax liability on investment earnings and an upper rate of 40%, the tax benefit on the total ISA allowance available is worth approximately £15.25bn.  With total ISA investments of just under £350bn, savers and investors have had around £2.3bn tax-benefit.  However, an approximate £12.9bn of further tax-benefits has been missed.

Since 1999, savers have on average failed to invest more than half of the maximum ISA allowance every year (£2,498), and now annually save less on average than when ISAs were first launched.  By failing to use their full ISA allowance, savers have on average missed out on over £1bn of tax-benefit on their saving returns every year.

With increased allowance of £10,200 in 2010/11, it is estimated that by failing to make use of the total ISA allowance fully, UK savers could potentially lose an estimated £1.7 billion pounds in tax-free interest from their savings and investments in the new tax year.

Commenting, Steve Reid, retail director for Clydesdale Bank, said: "An ISA should form the basis of any taxpayer's savings portfolio.  By not taking advantage of these tax-free accounts UK savers have potentially lost billions of pounds in tax they need not have incurred.

"With the new, higher allowances from April, the advantages of ISAs are even greater.  Savers really should not miss out on these allowances.  Even if every taxpayer only used their full cash allowance from 5th April, the total saved in ISAs would rise next year by 45%, meaning they paid almost a billion pounds less in tax."