Have you topped up your ISA yet?

By Holly Thomas , Wednesday 27 February 2013

Savers have £11,280 to invest in an ISA before midnight on April 5 - but millions will fail to use this valuable tax break.
Answers to your personal finance dilemmasMore than 11m people paid into a cash ISA last year

A whopping 19 million people are still failing to take full advantage of their tax-free allowance, losing out on £165 billion in tax-free savings.

The deal is, you don't pay capital gains tax on your ISA investments, nor will you pay income tax on your ISA savings, and you don't have to mention ISAs on your tax return.

Some 31.5 million people intend to save into a cash ISA in the current tax year – a 26% increase on last year.

Of those definitely intending to put their money into a cash ISA year, the average amount they plan to save is £3,248. However, more than a quarter plan to use their full cash ISA allowance of £5,640. Retirees look set to save the most, putting away £3,901 on average.

Getting interest paid net of any tax is good news given that interest rates are frustratingly low these days.

Personal finance expert Kevin Mountford explained: “With the cost of living on the up, and inflation remaining high, putting a little away each month into an ISA can help fund any unexpected expenses that may occur. At times like this, it is important to make sure your money is working as hard for you as it can do, and opening a cash ISA is one of the most tax efficient ways to save and earn good interest on these savings.”

HMRC figures show that 11.36m people paid into a cash ISA last year. One thing to look out for is if your ISA rate is about to drop. Many accounts offer a bonus rate which lasts for 12 months and the basic interest rate can be less than half – 90% less in some cases.

Although you may want the security of a cash buffer for emergencies, bear in mind that low interest rates and high inflation means your cash ISA's real capital value will slowly be eroded.

Stocks and shares ISAs offer the possibility of greater long-term returns - provided you are prepared to accept the risk to your capital, and the fluctuations in income that investments produce.

If a couple invested the maximum ISA allowance every year over the next 10 years, assuming the limit increases by 2% a year and a 5% return, this could be worth an impressive £323,657 (before investment charges) which could be partly or fully encashed without being subject to either income or capital gains tax. Assuming a 5% income, this could generate a tax free income of around £15,412 a year.

On April 6 – the new tax year - you will have a fresh allowance of £5,760 for a cash ISA and and the overall ISA allowance will increase to £11,520.

* Holly Thomas is the deputy personal finance editor of The Sunday Times.

The opinions expressed are those of the author and are not held by Saga unless specifically stated.

The material is for general information only and does not constitute investment, tax, legal, medical or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.


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