Are you missing out on tax-free interest?

22nd May 2012  

ISA’s have been with us for a while now, but it seems that people still don’t quite understand how to make the most of their investment or their money. Savers could be missing out on a colossal £242million a year of tax-free interest, purely because they leave cash that could be converted over into an ISA sitting in their current account at the end of the month.

A recent study from Santander, who seem to be leading the way in understanding how people organise their finances, has indicated that three quarters of people in the UK who hold cash ISA accounts have money left over before their next pay day. However, most of them are not using their full tax-free allowance and therefore could be missing out on a big wad of tax-free interest.

The full ISA cash allowance is £5,640 a year, which breaks down to £470 a month. Astonishingly, most of those with ISA’s have more than that left over at the end of the month (£498) but only 17% take advantage of their ISA allowance and invest that extra ‘slush fund’ into their savings accounts. Santander has worked out that if everyone who held a cash ISA put £400 out of their £498 extra into an ISA, collectively they would benefit to the tune of £242million in tax-free interest.

Investors who want to go further can invest a further £5,640 this tax year in stocks and shares and obtain any benefits or growth tax free.

Why the reluctance to invest?

So what’s stopping savers from taking full advantage of their ISA allowance? It could be down to the economic climate and a general fear of ‘locking’ funds away. With such a fragile economy and everything from food prices to the cost of interest payments on credit cards going up, it might be that consumers want that peace of mind that they have ‘money in the bank’ that they can access quickly and without having to pay a penalty. Very few consumers are in it for the long game at the moment, and short-term concerns are dictating people’s behaviour when it comes to savings.

But if you are in it for the long haul, cash ISA’s offer one of the best returns available in the UK on fixed interest deposits. Over 10 years, even a cash only ISA could mount up to well over £50,000, meaning an annual tax saving of more than £300 for a basic-rate taxpayer and a healthy £600 for those in the higher tax bands.

Some ISA’s offer easy access terms too, but watch out for early withdrawal penalties. But if you can afford to make the most of a cash ISA, many are offering a comparatively chunky 3.4% interest level that’s way above base rate.

Managing your money

Making the most of your yearly allowance on an ISA is time sensitive, and the deadline for paying in for the 2011/2012 tax year has now passed. But this is the ideal time to look at ISA funding for the next financial year, and build up a healthy little nest egg that in the long term is going to offer you a greater rate of return than a normal savings account.

Taking advantage of the deals on offer is exactly the same as looking around for great credit card deals. You need to study the small print carefully and decide what type of cash ISA best suits your needs, your lifestyle and your long-term plans.

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