All adults in the UK can invest up to £11,520 into an individual savings account (ISA) for the 2013/14 tax year. The full amount can be invested in a stocks and shares ISA or up to half (£5,760) can be put into a cash ISA. It's a good idea to use as much of your ISA allowance as you can afford to each year because returns are tax-free and you can't carry over any unused ISA allowance to the following tax year.
The tax year runs from April 6 to April 5 the following year and you have until midnight on April 5 2014 to use up this year's ISA allowance. The annual ISA allowance increases each year in line with inflation and as of April 6, 2015, the allowance will rise. Again, up to half can go into a cash ISA.
For Junior ISAs, you can pay in £3,720 in the current tax year and this will rise for the 2014/15 tax year.
Watch out when withdrawing money
If you've used up your annual cash ISA allowance and withdraw money, be aware you can't then top it back up again to the full amount. This also applies to smaller amounts. So if you had paid in £4,000 this tax year and then withdrew £2,000, you wouldn't be able to pay the full £2,000 back. If you did, you would go over your cash ISA allowance of £5,760 as you would have paid in a total of £6,000. Instead, you would only be able to pay in your remaining unused limit of £1,760.
Also be careful if you're transferring your cash ISA funds to a new cash ISA. For a start, you will need to check your new cash ISA allows transfers in and secondly, don't be tempted to withdraw the money yourself to transfer it. If you do, it will lose its tax-free status. Instead, inform your new provider you plan to transfer money in from an existing ISA and fill in a transfer form.
Where should I save my new ISA allowance?
If you want to save your ISA allowance into a cash ISA, you can choose from an easy access cash ISA or a fixed-rate cash ISA, just as you can with standard savings accounts.
If you choose an easy access cash ISA you will be able to get your money whenever you want to, but be aware the interest rate will be variable so can change at any time and you will lose the tax-free status on your cash as soon as you withdraw it.
With a fixed-rate cash ISA, the interest rate will be fixed and you will usually earn a higher rate of interest than with an easy access cash ISA.
With a fixed-rate cash ISA, the interest rate will be fixed and you will usually earn a higher rate of interest than with an easy access cash ISA. However, you will need to be prepared to lock away your money for a year or more. The longer you are happy to leave your money untouched, the higher the rate of interest will be.
When a new tax year starts, it's well worth investing your ISA allowance as soon as possible if you can afford to so that you see the full benefits. For example, if on April 6 2013 you paid your allowance of £5,760 into a cash ISA paying 3%, by April 6 2014 you would have £172.80 in interest.
However, if you only put in the full allowance on March 6 2014, you'd have just £14.21 in interest by April 6 2014.
Alternatively, if you'd prefer to invest your money in a stocks and shares ISA, there are thousands of different investment funds to choose from. It's a good idea to speak to an Independent Financial Advisor (IFA) first as they will be able to advise you on which investments suit your needs best. However, you will have to pay for this advice.
Bear in mind that with a stock market investment, the value can fall as well as rise so you may lose money. Higher risk investments have the potential to bring you larger returns, but they are also more volatile. It's well worth choosing a variety of investment funds to help spread the risk.
Getting the best deal
If you're still contemplating where to invest your ISA allowance, MoneySupermarket's free independent comparison service compares hundreds of different ISA deals to help you find the right one for you. It's easy to use and is a quick way of comparing the best deals on the market.