1. Why have an Isa?

Isas are tax efficient and flexible. The tax advantages mean that any income or capital gains you earn on your savings in Isas is all yours and doesn’t have to be mentioned on your tax returns. They don’t have to run for a fixed term to qualify for these concessions either.

2. A wide choice

There are two types of Isa, a cash Isa and a stocks and shares Isa. Savers can invest their money in three ways: cash (special bank or building society accounts), stocks and shares (usually investment funds) and insurance (usually with-profits or unit-linked funds).

The beginner's guide to Isas

Times Money explains the workings of individual savings accounts (Isas)

• Top tips on investing your Isa when markets are in turmoil

• Ten things you should know about Isas

Background

• How to get a divorce from your bank

• Ten thing to know about children's savings

• Ten things you should know about Isas

• Q&A: Child Trust Funds

Related Links

• Top tips on investing your Isa

Isas and taxes on dividends

A 10 per cent tax is deducted at source on dividend income whether the equity is held within an Isa or not. However, higher-rate taxpayers will have to pay an additional 22.5 per cent tax on the dividend income in their tax return unless the equity is held in an Isa.

New Isa rules starting in the 2008/09 tax year

There is a new overall annual investment limit of £7,200

You can invest all of this in equities

Or up to £3,600 in cash and £3,600 in equities

You can now transfer previous years' cash Isa savings into equities without effecting your yearly limit.

3. Open to all

Any adult living in the United Kingdom can open an Isa and even young people aged 16 and 17 can have cash Isas — minimum investments start at £1. Regular savings into stocks and shares Isas usually start at £30 to £50 per month.

4. Why everyone should have a cash Isa

Everyone needs some savings in a cash account for security and easy access. Cash Isas are ideal as the interest is tax-free. Also the rates paid on Isas are usually higher than average. Many are instant access accounts so you can withdraw money at any time.

5. Why hold shares in an Isa?

There is no immediate tax advantage for basic-rate taxpayers, but higher- rate taxpayers benefit because they avoid the extra tax payable on dividends received outside Isas. But basic-rate taxpayers still gain a tax advantage if they invest in corporate bond funds because the 20 per cent tax on the interest can be reclaimed. They also benefit from having no Capital Gains Tax to pay on any rises in the value of their investments. They may also benefit when they retire because income from Isas will not be counted towards their age allowance.

6. Uses for Isas

Cash Isas are a good choice if you are saving for a specific goal that is less than five to seven years away. Stocks and shares Isas are often recommended as a way of boosting retirement savings in a taxefficient manner, and can be used later to generate a tax-free income to supplement a pension. Insurance Isas are also designed for long-term saving, but have tended to be less popular.

7. Isas are freely available

Most banks and building societies, insurance companies and fund managers offer Isas. But they do not all offer the same returns so don’t just go for convenience and take the first one you are offered (see point 8).

8. Getting a good deal is not difficult

Interest rates on cash Isas can vary considerably so it is worth shopping around. The highest rates are usually available on postal or telephone accounts. If you want a stocks and shares Isa, you can save on initial charges by investing through a discount broker such as Bestinvest (www.bestinvest.co.uk), or Financial Discounts Direct (www.financial-discounts.co.uk). Seek advice if you are not sure what type of stocks and shares Isa will meet your needs.

9. Old Isas don’t have to be neglected

If you have a cash Isa that is now paying a poor rate of interest, or a stocks and shares Isa that has not been performing well, you can transfer your money elsewhere without any loss of tax concessions providing the transfer is arranged by the new manager.

10. Maximise allowances

In December 2006, Gordon Brown put Isa savers out of their misery by annoucing that instead of reviewing Isas, they would become a permanent savings option. So make sure you make full use of your tax-free savings allowance each and every year.