Consumers could be missing out on £191 billion in tax-free savings, with the number of people using individual savings accounts (ISAs) set to fall by 9% this year.
The new study from uSwitch reveals that just 54% of Brits plan to put money into an ISA, which would allow their savings to grow without having to pay the tax on the interest they receive.
The current financial year, which ends on 5 April 2014, gives people a tax-free allowance of £5,760, which they can put into a cash ISA and allow it to accrue interest.
From 6 April 2014, the cash ISA allowance increases to £5,940, but demand is decreasing with one in ten saying the interest rates are not worth it and one in five saying they cannot afford to save into an ISA.
While the base rate has remained at an historic low, but steady – the average cash ISA rate this year has fallen – down to 1.64% from 1.87% this time last year.
High interest current accounts
With current accounts such as Nationwide’s Flex Direct paying 5% AER on savings up to £2,500 and Santander’s 123 account offering 3% AER on savings between £3,000 and £20,000, it’s unsurprising that 43% of consumers are using their current account as their main way of saving.
Many cash ISAs are unable to compete with some high-interest current accounts, even with the added benefit of tax-free interest.
Moreover, the average amount consumers are planning to save into a cash ISA this tax-year has decreased by £121 – down from £3,723 last year, to £3,602 – and less than four in ten (38%) are intending to take full advantage of their allowance of £5,760.
As a result, uSwitch’s report shows that 23 million UK adults are failing to benefit fully from this tax-free allowance, losing out on £191 billion in tax-free savings collectively.
Despite the fact that fewer consumers are saving into a cash ISA, over a third (34%) of consumers recognise it’s important to take advantage of the full allowance.
2014 ISA season’s ‘dismal rates’
As a result, three quarters of Brits are willing to make sacrifices to max out their ISA allowance, with 10% prepared to sacrifice a holiday and a fifth happy to cut out daily luxuries.
Over a fifth would sacrifice a new car or home improvements in order to save the full amount, but the ISA season has been described as “dismal” by uSwitch personal finance expert, Jafar Hassan.
“Even locking away your money won’t give you much to shout about with very few short-term, fixed-rate cash ISAs offering more than the tax-free 1.75% savers can earn with easy-access accounts,” he said.
“Luckily, current accounts are offering consumers a lifeline. With rates of up to 5%, it’s no surprise that savvy savers are turning their backs on ISAs and putting any money they can into a current account, where it will work much harder for them.”