Two thirds will miss out on an ISA, tax free savings

According to research by Birmingham Midshires, part of Lloyds Banking Group, two thirds of British savers will not use their ISA allowance for this tax year and miss out on tax free savings.

So far less than 25% Britons have used their ISA tax free savings allowance, although another 10% do plan to take out an ISA before 5 April 2009, the end of the tax year.

Many savers are not putting savings into an ISA as they feel that the low interest rates mean that being tax efficient won’t make enough difference on the interest amount they receive.

Birmingham Midshires have however calculated that taking the average interest rate on an ISA as 3%, to achieve the same interest payment on a regular taxable savings account would require the interest rate to be 3.75%. For higher rate tax payers this would rise to 5%.

Currently Birmingham Midshires have a 1 year fixed rate ISA at 3.00% tax free/AER. The minimum investment required is £500 and the maximum is £3,600, the maximum allowed into an ISA in this tax year.

This fixed rate ISA allows Cash ISA investments from previous years to be transferred into it.

It will be interesting to see what the average ISA rate falls to, particularly if the Bank of England further cuts the Base Rate today as widely anticipated.