Tax Free Savings - The Great British Tax Conundrum

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Research highlights we are a nation suffering from high levels of tax illiteracy which could result in savers needlessly wasting millions of pounds. Fidelity has launched the “Know your Tax” campaign to help people understand their taxes and make their savings more tax efficient.

We believe everyone should have some level of understanding about their own position otherwise; they could be throwing money away. There are a number of steps people can take and we hope to help Britons better understand how to invest wisely.

New research* from Fidelity International highlights that the nation is suffering from high levels of tax illiteracy with an estimated 33 million UK tax payers saying they are confused about tax and especially tax free savings.

Fidelity’s report reveals that over one in seven (15%) UK taxpayers admit they don’t even know which tax band they are currently in. And there seems to be even more confusion amongst those that claim to know – with over a quarter (26%) of people with taxable income in excess of £50,000 thinking they only pay a basic rate (20%) of tax.

This confusion could explain the inertia of the population to make the most of the tax efficient savings products available to them - why two in five (38%) of those surveyed have yet to take any action to make themselves more tax efficient. Indeed, a quarter of people surveyed believe there is nothing they can do to reduce their tax liability.

This lack of knowledge could mean that people are needlessly gifting money to the taxman, simply because their savings and investments are not tax efficient.

Over the coming weeks, Fidelity will look in more detail at the different savings tax breaks available, increasing the nation’s knowledge of how they are taxed and to help educate Britons to better shelter their savings from the tax man.

“Paul Kennedy, Head of Tax and Trust Planning at Fidelity International, says:

“You might ask why people need to understand their tax position? Well, just as the Government takes a slice of your earnings in tax so too does it take a slice of the returns you make on savings and investments. By planning our savings and investment wisely, we can make them more tax efficient. Tax efficient, simply means arranging things in a way so that we keep the tax on our savings and investments to a minimum…and that means more for us and less for the taxman.

“We believe everyone should have some level of understanding about their own position otherwise; they could be throwing money away. There are a number of steps people can take and we hope to help Britons better understand how to invest wisely."

So what can you do?
Know your own position and how investments are taxed

When it comes to UK taxes, one thing is clear – as a nation we are finding it difficult to understand them; with two thirds (67%) of Britons saying the UK tax system is complex.

A worrying 91% of the nation is not able to name the correct income tax threshold for higher rate tax and 18% even believe this threshold to be at £50,000 or higher, rather than the current £37,400 limit. This confusion is particularly prevalent among those approaching the threshold – the very people who have the most to gain from a better understanding.

To invest tax efficiently, in conjunction with understanding their own tax position, people also need to understand how different types of investment products are taxed. Again, the survey revealed some disturbing trends. Asked across a range of 12 investments, many of them commonplace, whether they would be taxed or not a worrying 1 in 3 (33%) simply did not know. Of those that thought they did there were several who were wrong.

Get tax active!
41% of Britons say they have seen their taxes go up over the last five years and almost two thirds (63%) expect them to rise even further over the next five – even the majority of those earning less than £15,000 think they will pay more.

Despite this, only 15% of the nation have made use of tax efficient savings and investment wrappers to help reduce their tax burden, while just one in ten (10%) have sought professional help by consulting an accountant and/or independent financial adviser to help with their tax planning. By failing to do this, Britons savers could be throwing away thousands of pounds over their lifetimes.

By taking simple steps like sheltering savings in a tax efficient wrapper like an ISA, making regular pensions contributions and making the most of capital gains tax allowances, people in all tax brackets can shelter a significant amount from the taxman.

For example, basic rate tax payers could keep 31% more of their returns than if they invested without using an ISA wrapper. A higher rate taxpayer would benefit even more, keeping 84% more. Those to be hit by the new 50% rate would see the ISA produce 126% more**.

Even with equity investments there can still be a big difference. All investors will save capital gains tax and that means an extra 22% boost if that tax would have been payable. Higher rate taxpayers get savings from dividend payments as well, giving a compound 33% boost.

Notes to editors:
*Research conducted by Opinium Research, online survey of 2,000 people (nationally representative) between the 24th to 28th September 09.
**Source: Fidelity International, calculations for Corporate Bond investments based on interest returns only at an annual rate of 5% assuming money invested at the start of the tax year. Any other form of investment will give differing returns. Higher rate taxpayer calculations based on 40%, basic rate taxpayer based on 20% and new higher rate taxpayer based on 50%.
FIL Limited (“FIL”) and its subsidiary companies serve the major markets of the world by providing investment products and services to individuals and institutional investors outside the US. The value of tax savings [and eligibility to invest in an ISA] will depend on individual circumstances and all tax rules may change in the future.

For further information, please contact:

Sam Slator
Fidelity International
01737 837 847
07841 783882

Ali Boyle
Fidelity International
01737 837 881
07904 996086

Press office address: Fidelity International, Kingswood Place, Millfield Lane, Lower Kingswood, Tadworth, Surrey, KT20 6RP


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Judith Lewis

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