Making the most of your tax free savings allowance

Anybody that can afford to save these days should consider ISAs.

People looking to put some money away are likely to be put off by the low interest rates currently on offer. However, there are some accounts that allow savers to take all of the interest they earn rather than having to pay a portion to the tax man.

Individual Savings Accounts (ISAs) allow savers to keep 100% of the returns, so account holders can bypass the income tax that normally applies to standard savings accounts.

There is a limit to the amount that can be invested into an ISA each year, and the current allowance is set at £10,200. Only half of this amount can be used up with cash ISAs, however up to the full amount can be invested into stocks and shares ISAs, allowing investors to take take full advantage of their shares and come away with the full returns.

The ISA limit is to increase at the start of the new tax year (6 April), so savers can expect to be able to save up to £480 more than the current tax year – that's £240 more every year for a cash ISA.

Savers cannot carry their allowances across to another tax year, so people should take advantage of this tax-free break while they can as they will lose potential allowances if not.

Once funds have been placed into an ISA they will never be subjected to income tax for the time they stay, so a tax free haven can quickly be built up.

It is important to remember that once funds are put into an ISA, your allowance will be reduced, and if you withdraw from your account you wn't be able to re-deposit it. For example if you deposit £5,100, then decide to withdraw £1,000, you will not be able to put the £,1000 back until the following tax year, and your allowance will be reduced in turn.

Fixed rate ISAs tend to offer the highest interest rates, as these require savers to leave their funds untouched throughout the duration of the account, making them similar to fixed rate bonds. This option can be good, as the whole idea of ISAs is to leave your savings to build up over time, providing you a tax-free haven. The draw-back to fixing your rate is that if rates increase (which they are predicted to this year) then providers are likely to increase the rates offered so your funds will be left earning a below average rate.