The research, carried out to support unbiased.co.uk’s annual TaxAction report, shows that the most common source of waste is unused allowances for cash ISAs, which could account for as much as £1.2 billion. According to the figures, an additional 55 million ISAs could be opened by the public under the current eligibility criteria.

UK taxpayers could also be losing an additional £104 million due to the incorrect use of stocks and shares ISAs. Around 1 million UK households could be holding eligible stocks and shares outside an ISA – and attracting tax liabilities in the process – rather than taking advantage of an ISA’s tax free allowances.

A further £2.4 million of waste stems from a failure to use Junior ISAs. Junior ISAs were introduced over three years ago, but there remains over seven million under-18s without access to a tax-free savings account. According to the study, these accounts could generate tax efficient savings of £435 million – and deliver potential tax savings of £2.4 million – if used as commonly as Child Trust Funds.

ISA tax waste summary at a glance:

• £1.3 billion: Total tax waste by not making use of tax efficient ISA allowances
• £1.2 billion: Cash ISAs
• £104 million: Stocks and shares ISAs
• £2.4 million: Junior ISAs

Prudential and unbiased.co.uk recommend that savers review their arrangements and use as much as they can of their ISA allowances by the 2014/2015 deadline of 5th April 2015. Under current rules, consumers can save up to £15,000 in any combination of cash ISA and stocks and shares ISA.

“While ISAs may be perceived as relatively simple products, financial advice is important to fully understand the range of investments available within the ISA wrapper – from stocks and shares, to gilts to cash to life policies,” said Les Cameron of Prudential. “Independent financial advisers can guide investors through the process of making the investment and tax choices that best suit their own individual circumstances.”

Karen Barrett, chief executive of unbiased.co.uk, lamented that “£4.9 billion is set to be wasted in overall tax inefficiencies this year, with ISA waste making up a large share of this”. “A professional financial adviser can help you explore all your options. An adviser can explain to you how to get started, and also look at your overall tax position and make sure your finances are working for you as hard as they could be.“