UK savers confused about the tax relief available to them

Savers in the UK are confused about the tax relief that is available to them and many still fail to take full advantage of their ISA tax break, according to the research from the Nationwide Building Society.

When it came to stating the correct ISA allowance for the next tax year, 95% of those surveyed did not know what their full allowance will be, while one in five mistakenly stated their cash ISA allowance for the current tax year.

More than a quarter (26%) do not think there is a limit on how much they can pay into an ISA each year while nearly two fifths (39%) believe tax is paid on the interest earned on money in an ISA.

The research also found that more than half (51%) do not have a cash ISA and more than three quarters (79%) do not hold a stocks and shares ISA while over a quarter (26%) do not plan to use any of their cash ISA allowance in the next tax year, while almost two in five (39%) do not plan to use any of their stocks and shares ISA allowance.

Also, while nearly a third (31%) of people surveyed said they reviewed their savings on a monthly basis, 24% of respondents claimed to have no savings at all and 55% said they do not know what interest rate they are earning on their savings.

Furthermore, 39% of respondents do not think they are taxed on the interest earned on instant access savings accounts.

By utilising their ISA tax relief, people can help to ensure that no matter how much they can afford to save or invest within the limits of their annual allowance, any interest earned will not fall into the hands of the taxman, Nationwide says.

With the average cash ISA rate standing at 2.27%, a saver investing their full current cash ISA allowance of £5,100 could earn an annual tax free income of £115.77, while a £10,200 investment made into a stocks and shares ISA on 6 April 2010 could now be worth £11,077, it claims.

An investor, who has fully utilised their stocks and shares ISA allowance since April 2006, could have an investment that has grown by 5.75% per annum, the Nationwide adds.

‘Our research shows that there is still a great deal of confusion and misunderstanding around ISAs, and that people are still not taking full advantage of the tax breaks that they offer. We estimate that cash ISAs alone are saving consumers over £680 million in tax a year, clearly a substantial saving,’ said Robin Bailey, Nationwide's director for savings and investments.

'What's more, few people are taking advantage of their ISA tax relief by utilising their stocks and shares ISA allowance, and are therefore missing out on the potential for even greater growth on their investments. A better understanding of ISAs could help consumers make more of their annual allowance, helping put more money into the hands of savers and investors,’ he explained.

‘The low Bank of England base rate environment has meant that savers need to keep a close eye on the rate they get from their savings provider. Yet over half do not know the rate they are getting. Among our seven Savings Promises, Nationwide has pledged to send savers a statement of the interest rate they are earning as well as an overview of the products available to them. This gives our savers more control over their money,’ he added.