Here, we explain how ISAs work…

What are ISAs?

An ISA (individual savings account) is a tax-free savings vehicle. The fact that returns are tax free is a big advantage, as investments held outside an ISA wrapper are liable to income or capital gains tax.

How much can I invest?

You can invest £10,200 into an ISA until 5 April this year. Next tax year, which starts on 6 April 2011, this limit will increase in line with inflation to £10,680.

How many ISAs can I have?

You can open one cash ISA, and one stocks and shares ISA each tax year.

Your annual allowance can be split and up to half, can be put into a cash ISA while the remainder can be invested in a stocks and shares ISA.

This means that in the current tax year, you can invest £5,100 in a cash ISA and the same amount in stocks and shares.

Alternatively, your full allowance can be invested in a stocks and shares ISA. The ISA is effectively a tax wrapper like a pension, so you can choose the underlying investments your money is invested in. Various non-cash assets can be held in a stocks and shares ISA, including unit trusts, investment trusts, open ended investment companies, bonds, individual shares and exchange traded funds. You can see our pick of the latest stocks and shares ISAs here.

Are all cash ISAs the same?

No. Cash ISAs are like any other savings account and there are a number of different types - easy access, fixed rate and notice accounts. Rates vary - you can compare the latest deals here.

There is one fundamental different between ISAs and standard savings accounts: tax isn't levied on the interest you receive from a cash ISA. Normally, higher-rate taxpayers pay 40% on any savings interest, while those in the basic-rate tax band pay tax at 20%.

Therefore, if you are a taxpayer, it is well worth making use of your annual ISA allowance.

When comparing cash ISA deals, there are several things to bear in mind. As with standard savings accounts, fixed rate deals tend not to allow more than one investment. You can also not usually access your money during the fixed term.

And many of the leading easy access accounts include introductory bonuses so the account may lose its competitiveness once that ends - you should be aware of this and be prepared to move your money again at that point (you need to be careful when moving money from one cash ISA to another - see below).

Can I transfer money I have invested in previous tax years?

You can transfer money invested in previous tax years without losing the tax-free status. However, you do need to be careful - if you close your existing ISA and then look to move the money into another account you will lose the tax-break.

When you apply for your new cash ISA, you will be asked if you want to transfer funds from another account. Your new provider will then arrange for the money to be moved across from your existing account.

However, some products are only available for new ISA money and transfers in aren't allowed - this is something to bear in mind when comparing deals.

Also, some providers will charge an exit fee when savers move money out of their cash ISA - another thing to note.

What if I don’t use my full allowance?

If you don't make use of your full ISA allowance it will be lost - you can't roll it over in to the next tax year.

Can I switch between cash and equities?

You can move money from a cash ISA into a stocks and shares ISA, but you can't switch from equities to cash.