35% of users missing out on tax breaks
A worrying 35% of Moneywise.co.uk users have not taken advantage of the tax breaks offered by ISAs so far this tax year.
In an online poll, the majority of respondents admitted that they have not put any money into an ISA despite this type of saving offering protection from the taxman.
The poll shows that just 18% have invested up to £3,000 in an ISA this tax year while 32% have invested between £3,000 and £5,000. But only 3% of Moneywise users have saved between £5,000 to £6,999.
Finally, 14% of users have utilised their full ISA allowance of £7,000 for the tax year 2007/08.
What is an ISA?
An ISA is essentially a savings wrapper that allows your money to grow tax-free and this tax year savers can shelter up to £7,000 from the tax man.
Currently, people can either save £3,000 in a mini-cash ISA and up to £4,000 in a stocks and shares mini ISA, or invest the full £7,000 in a maxi ISA.
But from April 2008 the ISA rules will change and the terms 'mini' and 'maxi' ISA will be scrapped. Savers will be able to invest up to £3,600 in a cash ISA or £7,200 in an equity ISA. They can split their money between cash and equities, but cannot exceed the £3,600 limit for cash.
What are the advantages of an ISA?
If you paid £3,000 into an ISA paying 6% then you would earn £180 in interest. You would also earn this amount in interest if you put the same amount into a normal savings product priced at 6%, however the interest would be taxed. A basic rate tax payer would have to pay £39.60 while a higher rate taxpayer would have to stump up £72, taking a substantial chunk out of their interest.
Matt Pitcher, wealth adviser at Towry Law Group, said it is “madness” not to utilise your ISA allowance.He added: “I understand that not everyone wants to be exposed to the stockmarket at the moment but many forget that you can also invest up to £3,000 in an cash ISA. There is no reason not to have your money in an ISA.”
Best ISA rates on the market
With just seven weeks left until the new tax year is upon us, time is running out for people who have not yet utilised their ISA allowance.
However, the good news is ISA rates are competitive at the moment as providers vie for last-minute investors.
For people who require instant access or have less to save, Alliance & Leicester offers a no notice account paying 6.25% AER of deposits of just £1. However, this rate includes an introductory bonus rate of 1% until 31 May 2009.
If you would rather invest your cash in a fixed rate ISA, then Northern Rock tops the market. For people with at least £500 to set aside, it offers a one-year fixed account paying 6.2% until 15 September 2008 or a three-year account at the same rate until 15 September 2010.
And don't forget to vote in our latest Moneywise poll.
A savings account on which the account holder is required to give a period of notice before making a withdrawal or face a penalty, usually a loss of a specific number of days’ interest or pay a fee. Notice periods of 30, 60 or 90 days are common. These accounts usually pay higher than average interest rates and require large initial deposits (£1,000 minimum) so the notice period and penalties are there to discourage withdrawals. Some of these accounts will only allow a certain number of withdrawals a year.
There are limits to how much you can invest in any tax year. For 2011/12, the limit is £10,680. Of that, the maximum you can invest in cash is £5,340 and the balance of £5,340 can be invested in shares (individual company shares or investment funds). If you don’t take the cash ISA allowance, you can invest up to £10,680 into a stocks and shares ISA.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.
Where APR is the rate charged for money borrowed, Annual equivalent rate is how interest is calculated on money saved. The AER takes into account the frequency the product pays interest and how that interest compounds. So, if two savings products pay the same rate of interest but one pays interest more frequently, that account compounds the interest more frequently and will have a higher AER.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.