35% of users missing out on tax breaks

Piggy bank

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.

Scarborough Building Society currently offers the most competitive cash ISA paying 6.3% AER on deposits from £1,000. However, savers will need to give 30 days' notice to access their funds.

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.

To find out the best ISA rates and other saving products read our daily savings round-up or check out our best-buy tables.

And don't forget to vote in our latest Moneywise poll.

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