Investors waste £133 million in tax benefits
Despite ISAs providing tax-free wrappers around investments, official figures reveal £133 million is wasted each year by investors who hold equities but fail to use their full ISA allowance.
IFA Promotion, which compiled the figures using official statistics,
says the amount of money being wasted by investors increases every year and is set to rise further once the new ISA rules come into play from 6 April.
The current allowance for stocks and shares ISAs is £7,000 but this will increase to £7,200 when the new tax year begins.
It’s not just investors who are missing out on tax benefits – around £249 million is paid in unnecessary tax as a result of savings outside of cash ISAs. Despite the option to save £3,000 every year in a cash ISA (rising to £3,600 from 6 April), IFA Promotion says many savers are choosing to put their nest eggs in accounts that are not exempt from tax.
David Elms, chief executive of IFA Promotion, says that - in total - people pay £382 million in tax because they hold their money in savings accounts or investment vehicles without utilising their ISA allowances.
He added: "Savers should use the next weeks to make sure they have made full use of their ISA allowance – if you decide not to save into an ISA, you will end up paying more tax.
"And once you have missed the 6 April deadline, you will lose you tax-free savings allowance for the 2007/08 tax year."
Matt Pitcher, a wealth manager at Towry Law, says the new ISA rules coming into force on 6 April have raised awareness among investors of the tax benefits of using ISAs.
He added: "The new ISA rules offer simplicity and people are starting to wake up to the fact that ISAs offer a valuable tax wrapper."
With the new tax year – and new ISA rules - nearly upon us, the cash ISA market is getting more competitive. To find the best cash ISAs currently on the market check out our daily savings guide.
Are you confused by the new ISA rules? We’ve collected some of the best ISA questions and answers from our recent webchat with Scottish Widows’ savings expert Anne Young.
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.
A financial adviser who is not tied to any financial services company (such as a bank or insurance company) and is authorised by the Financial Services Authority (FSA). They can advise on financial products to suit your circumstances. All IFAs have to give consumers the choice of paying by fees or commission and have to explain which would best suit the customer in that particular instance. Also, if commission is paid either by the client or the financial service provider recommended by the IFA, the IFA must disclose what that commission is.
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).
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.