Millions of people continue to pay tax unnecessarily on their savings by failing to make use of their annual ISA allowance, so make the most of yours while you still can.
New research by moneysupermarket.com reveals that basic tax rate payers who invested the maximum allowance into a cash ISA when they were launched twelve years ago, and every year subsequently, could have earned £14,504.42 of interest compared to £11,150.60 from a basic easy access account, therefore boosting their savings pot by £3,353.81.
-Compare cash ISAs
A higher rate taxpayer would have earned £8.009.18 from a normal savings account, but investing their money in an ISA could have earned them an extra £6,495 in interest.
Kevin Mountford, head of banking at moneysupermarket.com, said: "These figures speak for themselves in showing that consumers who can afford to save should be utilising their cash ISA allowance as a first step. For higher rate tax payers it is even more important to take advantage of the tax benefits offered from an ISA and protect their savings pots from the taxman."
Use it or lose it
Despite the huge savings you can make from making the most of your annual allowance, Nationwide Building Society claims that around two thirds of eligible people do not have a cash ISA, and only one in seven has a stocks and shares ISA. As a result, they are handing money to the taxman every year which they could keep themselves.
You can invest up to £5,100 in a cash ISA this tax year, and the same amount in stocks and shares, or you can invest the full £10,200 allowance in stocks and shares alone. Next tax year, which begins on April 6, the annual allowance rises in line with inflation to £5,340 for cash ISAS, and to £10,680 if you want to invest only in stocks and shares.
If you've got savings available and you still haven't used your allowance this year, you'd be mad not take action as soon as possible. Once April 6 arrives, your 2010/2011 allowance will be lost forever.
Benefits of ISA saving
Savers who use their ISA allowance every tax year can earn significant returns, even in today's low interest rate environment, and they can be particularly useful for those looking to supplement their income.
For example, figures from Nationwide reveal that someone who has fully maximised their cash ISA allowance over the last four years (£13,200) and is planning to maximise their cash ISA allowance of £5,100 this year, will have a balance of £18,300 to invest. Assuming customers receive a rate of 2.50% interest, they could receive an income of £457.50 per annum, tax-free.
The good news is that ISA providers are busy launching accounts in the run up to the end of the tax year, so there are plenty of great deals to choose from - many of which pay more than 2.50%.
Where to find the best ISA deals
If you are looking for easy access to your savings, then Nationwide pays a market-leading 2.90% on a minimum investment of just £1, and you can make unlimited withdrawals without penalties. However, you must have one of Nationwide's card accounts to be eligible to open the e-ISA.
Alternatively, West Bromwich Building Society has just launched a WebSave ISA paying 2.88% on a minimum investment of £1,000. This rate includes a bonus of 1.12% until February 29, 2012. Like the Nationwide e-ISA, this account accepts transfers in from previous years' ISAs. You can make up to three withdrawals each account year but any further withdrawals will incur a charge equal to 60 days' loss of interest.
Other top deals include Santander's Flexible ISA which pays 2.85% on a minimum investment of £1, and the Halifax , which pay 2.80% annual interest. Qualifying current account holders with either Halifax or Bank of Scotland earn a higher rate of interest at 3.00%. The Santander account does not accept transfers from other providers, but the Halifax and Bank of Scotland ISAs do.
-Compare cash ISAs
Lock up your savings for higher rates
If you don't need access to your savings, then you could consider locking into a fixed rate ISA. Rates are usually higher than those offered by easy access accounts - but be wary about locking your money up for too long.
Many experts are predicting that interest rate rises are just around the corner, so you don't want to find yourself trapped in an account that is no longer competitive.
Northern Rock currently pays 3.05% annual interest tax-free on its one-year fixed rate ISA, which savers can open with a minimum investment of £500. If you withdraw any cash before the end of the fixed-rate term, you'll lose 60 days' interest.
Savers looking for a two-year fixed rate ISA might want to consider Yorkshire Building Society's ISA, paying 3.50% on a minimum investment of £100. You can pay into the account whenever you want to, provided you don't exceed your annual ISA allowance, but there's a 120 days' interest penalty if you close the account early.
Act now
Whichever ISA you go for, don't hang around. The end of the tax year is less than two months away and, if you haven't used your allowance by then, it will be gone forever. There are very few opportunities to beat the taxman, so make sure you grab this one with both hands.
-Compare cash ISAs
By Melanie Wright, financial journalist for moneysupermarket.com
Please note: Any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct.
