Brits gifting thousands of pounds of interest to the taxman

British taxpayers are effectively giving thousands of pounds to the taxman by not taking full advantage of ISA allowances, it is claimed.

Basic rate taxpayers would be £3,300 better off if they have used their full cash ISA allowance every year while high rate taxpayers could save £6,463 in tax by using their full cash ISA allowance, according to research by moneysupermarket.com.

Savers who have taken advantage of their full cash ISA allowance each year since they were introduced in 1999 would be over £3,300 richer than if they had invested an equivalent sum in an easy access savings account, according to the analysis.

Basic tax rate payers using the tax free benefits offered from a cash ISA would have earned £14,504.42 in interest if they had opened a cash ISA when they were first launched 12 years ago. In comparison, a basic easy access account would have earned them £11,150.60 so their savings pot would have been given a healthy boost of £3,353.82.

For a higher rate taxpayer the difference of using a tax free wrapper for their savings is even greater as they would have earned £8.009.18 from a standard savings account, amounting to an additional £6,463.76 in interest.

‘These figures clearly show the benefits of opening an ISA, and taking advantage of the tax free benefits offered. Over time, a cash ISA can give a decent return with no risk and it should be the first account you open if you are looking for a longer term place for your funds. If you are a saver who also pays income tax then you are needlessly throwing money at the tax man when you don't need to,’ said Kevin Mountford, head of banking at moneysupermarket.

‘The maximum cash ISA allowance is £5,100 during this tax year, and this is set to increase to £5,340 from April 6 2011. If you have funds in an older ISA account, then double check the rate of interest being paid. The chances are you would be better off moving these funds to an account paying a higher rate. Bank's now have to adhere to new ISA transfer rules which came into force at the end of 2010, so the process should be painless,’ he explained.

‘As well as being able to use the cash ISA element, savers can also invest in stocks and shares ISAs which gives savers another option to shield their money from taxes. Although stocks and shares ISAs tend to offer a greater return than a cash ISA, they do come with more risk so should only be an option for anyone who is looking to save for the longer term. Make sure you understand the product before you buy and if necessary seek independent advice,’ he added.