Basically, your allowance of £10,680 can either be put totally in a stocks and shares ISA, or up to 50% of that can be put into a cash ISA.
So every tax year you have a designated ISA allowance. For this year ending on the 5 April its £10,680, but it does go up with inflation. So from 2012-2013 that will be £11,280.
If you are a taxpayer - whether standard rate or higher rate - then the first thing you should do in taking out a savings account is to use your ISA allowance. It’s important that you keep as much money as possible out of the hands of the taxman.
In terms of cash ISAs, just think of them as you do about every other savings account. You can have fixed rate, variable rate, regular savers etc. It is a wrapper around the savings account and that just protects the interest from the taxman, and it means there’s more money in your pocket.
Just remember, with ISAs they are the same as other normal savings accounts whereby the interest rates can actually drop, so make sure you keep an eye on the interest rate you are earning - not only from the current tax year, but also any savings you’ve had from previous ones. And remember, in many cases you can actually transfer monies from previous accounts.
So before you open up a new account, just check if it’ll allow you to transfer money in. If you can, then make sure you take advantage, the likelihood is that you’ll be getting a better interest rate.
The one thing you need to be careful of when you’re transferring your money, is that this money is contained in a tax free wrapper, so what you don’t want to do is close an account and then another. You just alert your new provider to the fact you have existing monies in an ISA and you want them to transfer it.
They’ll do the rest for you, and recently new regulation came in to make sure that the speed in which they transfer these is far better than it was in years gone by, so there’s nothing to worry about. Make sure that you keep up to date with current rates, and make the best use of your hard-earned cash.
Every year I fear that millions of people could miss out on their tax-free allowances, either because they don’t understand them or they just don’t act quick enough. They are very simple, particularly with cash ones, and there’s lots of choice on the market, so make sure that you use your allowance.
To see current ISA products and compare the rates against your own existing accounts, try searching using the MoneySupermarket.com ISA channels:
If you are interested in understanding more, we also interviewed some experts in the financial industry for their top tips about ISAs in our popular video "Top ISA tips from the experts".