April’s tax changes to slash Britain’s £1.95bn ISA tax wastage

15 Feb 2016

  • Tax-free interest on savings means Brits have the chance to avoid nearly £2bn of unnecessary tax payments
  • 2015s ISA allowance underused, seeing potential waste jump from £1.3bn last year
  • Higher and additional rate taxpayers still need to consider ISAs to reduce tax  wastage
  • £5,924 is the average sum being saved into a cash ISA

UK taxpayers have been saved nearly £1.95bn in unnecessary tax payments as April’s changes will hugely increase the potential for tax-free saving, as revealed by data from Prudential and unbiased.co.uk, the UK’s favourite place to find financial and legal advisers.

Tax Action 20161 found that the £1.3bn that was wasted last year2 would have risen in 2016 to £1.95bn, as people have been failing to take advantage of the new ISA saving allowances. However, from April savers can receive up to £1,000 in interest tax free. Meanwhile there is still an incentive to use the full cash ISA allowance for this year before the changes come into effect.

Karen Barrett, chief executive at unbiased.co.uk, comments: ‘The tax-free interest allowance is bringing a revolution in savings for the majority of people. ISA season, and carefully managing yearly savings allowances, may now be a thing of the past for most lower rate taxpayers, but this should not be taken as an invitation to do nothing and leave your money where it is. Savings rates are still very low, so this is a chance to really think about what to do with your money and shop around for the best accounts.

‘Just as pension freedom created a wealth of new options and decisions to be made, these savings tax changes will do the same for people’s shorter term financial planning. They need to be understood and acted upon, as old savings and investment habits won’t necessarily provide the best answers.

‘Higher rate taxpayers receive only £500 of tax-free interest, while additional rate taxpayers receive none, so the ISA should still be an important part of their tax-efficient financial planning. The reduction in the lifetime allowance on pensions means that putting money into an ISA every year will help create a separate pot of tax-free cash, which will help them to continue saving despite the new restrictions.’

Stocks & shares ISAs

£134 million of the predicted unnecessary ISA tax wastage is due to come from stocks & shares ISAs being under-used.

A surprising 23 per cent of those with a cash ISA but not a stocks & shares ISA have never even considered one, with a further 11 per cent unsure of the benefits, and 10 per cent said they wouldn’t know how to set one up. Those put off stocks & shares ISAs by the additional risk involved say that, on average, they would consider taking on the extra risk if they could get a return of 10 per cent.

However, if those who currently hold stocks and shares outside of ISAs were to move these investments into ISA wrappers, the additional tax benefit would amount to £134 million saved nationwide.

Karen Barrett continues: ‘ISAs have become more flexible recently, with new legislation letting you pass on your ISA to your spouse, and the Flexible ISA from April this year allowing you to withdraw and replace your savings within the same year and not lose a penny of your tax-free allowance.  The already hugely popular Help-to-Buy ISA is another new option, in this case specifically for first-time buyers.

‘If you are unsure about the best way to begin, or you don’t know whether an ISA is still the best option for you, a professional financial adviser can help you explore all your options. An adviser can explain to you how to get started, and also look at your overall financial position to make sure your money is working for you as hard as possible.’

Les Cameron, tax specialist at Prudential, comments: ‘For many the new savings allowance will mean a cash ISA will have no apparent tax benefit.  However, concentrating on tax alone is fundamentally flawed, as this is only a small, albeit important, part of the overall financial planning considerations. 

‘ISAs remain a valuable resource for many, particularly with their generally higher interest rates, and as a way to supplement retirement income for high earners concerned about reaching the annual or lifetime pension allowance. With financial freedom continuing to increase, so too does the range of choices available to people in all financial situations, and the importance of receiving informed, thorough and tailored advice on your money.’


Notes to editors:

1 TaxAction report 2016 has been produced by Opinium Research on behalf of unbiased.co.uk. All figures are based on calculations done on unrounded values to guarantee accuracy; text paragraphs display rounded figures. Survey results come from an Opinium online survey, commissioned by unbiased.co.uk, of 2,006 UK adults aged 18+ carried out between 20th and 24th November 2015. Results have been weighted to nationally representative criteria.

22015 TaxAction Research can be found here.

The number of opened cash ISA accounts is now 10.29 million so using the existing figure for the number of current accounts open for 65 million, this means there is a potential 54.7 million further cash ISA accounts (55 million last year) which could be opened. Assuming these potential accounts hold the average currently held in existing accounts, the interest on these accounts at the 0.99% (the average quoted deposit interest rates at banks and building societies un the UK for a variable rate cash ISA) would amount to £3.2 billion.

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