How Much Can You Save In A Tax Free ISA?

An ISA offers tax free income on savings but many are failing to take advantage of this savings account. Do you know how much you can invest in an ISA?

According to Nationwide Building Society, many consumers are confused about the benefits of ISAs and failing to take advantage of their ISA tax relief.

Some 26% don’t think there is a limit on how much they can invest in an ISA each year and around 40% think tax is paid on the interest earned on money in an ISA.

So how much could an ISA be worth?

• With the average cash ISA rate standing at 2.27%² (according to Monefacts) a saver investing their full current cash ISA allowance of £5,100 could earn an annual tax-free income of £115.77
• A £10,200 investment made into a stocks and shares ISA on 6 April 2010 could now be worth £11,077 ⁽Calculations based on Schroder UK Alpha Plus fund up to 28/02/2011)
• 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 ⁽Calculations based on M&G Strategic Corporate Bond)

Robin Bailey, Nationwide’s director for savings and investments, said:”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 million⁵ in tax a year – clearly a substantial saving.  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.”

There are a number of ISA to choose from, both Stocks and Shares and Cash ISAs.

For example, Nationwide has a range of market-leading Fixed Rate ISAs paying between 3.10% and 4.40% gross p.a./AER (annual interest), e-ISA and Champion ISA, which tracks the average of the top five paying branch-based cash ISAs from a basket of eight key competitors and uses this as its core rate.  A fixed bonus until 30 June 2012 is then added on top of Champion ISA’s core rate for balances of £1,000 or more.

Other options include the recently released E-ISA from Barnsley Building Society and the Cash ISA Direct Reward from Halifax.

MoneyHighStreet.com comment: To get the best ISA deal to meet your needs you need to shop around and check beyond the headline rates. Don’t leave existing ISAs in a low rate account either. Check the rates you are getting and if need be switch to a better paying account.