Don’t miss out on your allowance

The race is on to capitalise on this year’s Isa allowance before the tax year ends on April 5 with some banks even extending their opening hours to deal with last minute applications. So why are Isas such a great way to save and how do the best deals compare?

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Banks and buildings societies are bracing themselves for the annual rush from savers who have left it until the last minute to take advantage of their annual Isa allowance.

The tax-year ends at midnight on April 5 and anyone who fails to use their £7,000 Isa allowance by then, will lose it forever.

Any money held in an Isa is exempt from income tax or capital gains tax, making it an attractive savings vehicle. Even so, around two-thirds of consumers are not planning to make use of this valuable tax-break.

While many households are undoubtedly feeling the pinch because of rising living costs, it is well worth taking advantage of the benefits Isas offer if at all possible, particularly as there are some exceptional deals available at the moment.

The market-leading ISA deals
Headlines have been stolen this year by a series of 10% Isa deals but unfortunately there are catches with all of these offers.

Alliance & Leicester’s (A&L) Premier Isa Issue 2 is paying 10% but it is only available to customers who also open a new Premier 50, Premier 21 or Premier Current Account with the provider.

Abbey’s Super Isa Issue 2 also has a headline rate of 10% but customers must invest an equal amount into its Guaranteed Growth Plan, or into one of Abbey’s equity funds.

As a more straightforward proposition, the Barclays Tax Haven Isa is offering the best rate at 6.5%, although this includes an introductory bonus for the first 12 months. It is available online to existing Barclays customers and through a branch to new customers. However, you cannot transfer money from another Isa into this account.

The best deals that do accept transfers are Abbey’s Direct Isa and A&L’s Direct Isa Issue 4 which both pay 6.25%. However, the rates do include introductory bonuses, which run until May 2009.

If you do not want to have to worry about moving your money again, the Icesave Easy Access account could be a good option. It pays 6.1% and the rate is guaranteed to be at least 0.3 percentage points above Bank rate until January 2011.

Another option if you are looking for a deal with no short-term bonus is Egg’s Cash Isa which has a rate of 6.05%. However, the Egg account does not accept Isa transfers, although it is good if you only have a small amount to put away as the minimum deposit is just £1, compared with £1,000 for Icesave.

Understanding how Isas work
The key difference between a cash Isa and a standard savings account is that you do not pay tax on the interest you earn in an Isa. This means returns are boosted by 20% for basic-rate taxpayers and 40% for those in the higher-rate tax band.

The annual Isa allowance is £7,000 although this will rise to £7,200 for the 2008-2009 tax-year. You can hold up to £3,000 in cash (increasing to £3,600 for the next tax-year). The remainder can be invested in shares or managed funds. Alternatively, you can put the full allowance in an equity-backed investment.

Because of the tax-free status, a higher-rate taxpayer who invests £3,000 in Barclays’ Tax Haven Isa will earn £78 more in interest over a year, than they would if they put the money in Kaupthing Edge’s Instant Access account – the highest-paying standard easy access savings account. Someone in the basic-rate tax-band would earn an additional £35. Like the Barclays’ Isa, the Kaupthing account is paying a rate of 6.5%.

Isa transfers
If you already have money sat in an Isa from previous tax years but are no longer earning competitive rate of interest, look to move it to another account. You can transfer cash from one Isa to another without losing the tax-free status.  However, you need to be careful: if you close your existing account first and then look to reinvest the capital, the tax-break will be lost. You have to make sure that the transaction is classed as a transfer, not an account closure.

Disclaimer: Please note that any rates or deals mentioned in this article were available at the time of writing.

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