Back in 2008, we ran a poll on compareandsave.com to see how our readers were using their tax-free ISA allowances.
If you are over 16, each tax year (from 6 April one year to 5 April the following year) you are given a set amount of money that you can save in an Individual Savings Account (ISA) throughout the year. This is called your ISA allowance.
Less tax to the taxman
What’s so great about the ISA allowance is that any interest you earn on it is tax-free, meaning you will keep all of the interest you earn. If you are a higher-rate taxpayer using an ISA, instead of a standard savings account, will give you 40% extra interest.
Our results showed that over half (54.5%) of respondents had used none of their tax-free ISA allowance during the2007/2008 financial year, which is obviously a concern when you consider the extra return that can be received.
A further 8.6% said that they had only used ‘some’ of their allowance, while 5.7% said they had used ‘most’ of it. This means a grand total of 68.3% of our 2008 poll respondents were not making full use of their tax-free allowances.
When this trend was applied to the entire proportion of the UK population old enough to use an ISA, it revealed that a staggering 33.8m people were not taking advantage of their tax-free savings option.
On the positive side, 31.7% of respondents said they had used ‘all’ of their allowance in the 2007/08 tax year.
To see if consumers’ ISA savings habits had changed in light of the tough economic climate, we ran the same poll this year asking people how much of their 2008/09 tax-free allowance they had used.
Positive change
Encouragingly, we saw a shift in the poll results this year, with only 42.6% saying they had used ‘none’ of their allowance – a drop of 12.9 percentage points.
What’s more, there was an increase in the number of people who had used ‘some’ of their allowance from 8.6% of respondents in 2008 to 12% in 2009.
The proportion of readers saying they had used ‘most’ of their allowance in 2008/09 was exactly the same as the year before at 5.7%.
The final positive result to come from the 2009 poll was that 39.7% of respondents had used ‘all’ of their ISA allowance during the 2008/09 financial year. This is an increase of 8.5 percentage points.
Changing habits?
At the end of the 2007/08 tax year, the credit crunch was really starting to take hold. The Bank of England Base Rate was at 5.25% leaving consumers struggling with inflated mortgage repayments plus the extra strain caused by steep increases in the cost of energy, fuel and food.
Although it was a very attractive time for savers in terms of interest rates offered on savings accounts, some consumers just didn’t have the spare cash to put aside.
However, some other consumers who could afford to save just didn’t realise the true importance of having a regular savings habit.
Unfortunately, it is these consumers, especially those who have been made redundant, who are likely to be struggling today.
The general rule of thumb is that you should have at least enough in savings to cover your living expenses for 5 months should you fall ill, or lose your job.
Lessons learned?
As a nation, the importance of a regular savings habit really has hit home and is probably the likely explanation for the shift in the poll results. After all, money has been tighter than ever over the last year and therefore it’s unlikely to be a result of people having more money to save because we are in a recession; money’s tight and pay rises are scarce.
However, it is likely that consumers have realised the benefits of a regular savings habit over the past year and, more importantly, how much of a difference tax-free savings can have in a turbulent economic current climate.
