This tax year (2020/21) you can invest up to £20,000 into ISAs, which is the same as last year. You can either put the full allowance into a cash ISA, or you can put it into a stocks and shares ISA.
However, the Junior ISA allowance has jumped significantly, rising from £4,368 to £9,000.
Alternatively, you can split your allowance and put some into a cash ISA and the rest into stocks and shares.
If you've yet to decide whether or not to make the most of your ISA allowance, here are five good reasons an ISA makes sense.
1) They don't count towards your personal savings allowance
Up until April 2016, if you had money held in a savings account, you had to pay income tax on any interest you earned. In comparison, interest earned in cash ISAs has always been tax-free.
However, thanks to the introduction of the personal savings allowance, basic rate taxpayers can earn up to £1,000 of savings interest a year in any savings account tax-free, while higher rate taxpayers can earn £500.
This means ISAs might not seem so attractive. But the big advantage they have is that any interest you earn from an ISA won't count towards your personal savings allowance, so it's still worth saving in one, particularly if you have a lot of savings or are a higher rate taxpayer. You can find out more about the personal savings allowance in our article.
If you invest in a stocks and shares ISA, any profits you make will be free of Capital Gains Tax (CGT), which would be payable if you invested outside an ISA.
2) You don't lose access to your cash
Many people steer clear of ISAs because they think they have to lock their cash away for the long term. However, plenty of cash ISAs are easy access accounts so you can make withdrawals whenever you need to.
And the good news is, as of April 6, 2016, ISAs have become more flexible. Whereas previously, if you invested the full £20,000 into a cash ISA and then made a withdrawal, you could not top up the account again in the same tax year, you can now replace any cash you have withdrawn (up to the ISA limit).
3) You can move your money to a better deal
If your ISA isn't performing as you'd hoped, then you can move your money into a different account - so long as it accepts 'transfers in'. You can also transfer from a cash ISA to a stocks and shares ISA, and vice versa.
However, avoid just cashing in your ISA to move your money across as you will lose the tax-free benefits of your ISA. Instead, you'll need to give your current provider instructions to transfer it to your new provider, which usually involves filling out a simple form.
4) You can start with just £1
You don't need thousands of pounds in the bank to open an ISA. Many cash ISAs can be opened with a minimum investment of just £1. If you want to open a stocks and shares ISA, most funds will accept monthly contributions starting from either £25 or £50.
Drip feeding your money into stocks and shares can also help smooth out stock market volatility, as you buy more shares when prices fall and fewer when they rise, and you don't have to worry so much about picking the right time to invest.
5) You can choose your own level of risk
If you are prepared to accept a higher level of risk in return for potentially higher rewards than a cash ISA can offer, a stocks and shares ISA could be a great place to start.
You can hold a wide range of investments in a stocks and shares ISA, including open ended investment companies (oeics) and exchange traded funds (ETFs), as well as individual company shares, funds holding shares or bonds and investment trusts.
Remember that the returns you receive will depend entirely on the performance of the fund or funds you have chosen to invest in. Shares can go down as well as up, so there is a risk that you may not get back as much as you put in. Visit our stocks and shares ISA page to find out more.
Please note: Any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct.