Updated: 4/1/2012

Everyone should be making the most of tax-free savings so find out everything you need to know, plus all the latest best buys with our comprehensive guide.

Banks are desperate to grab your custom before the 6 April ISA deadline hits – and so are trying to out-do each other by offering higher interest rates. This is good news for the man on the street – so read on to find out how to make the most of your ISA opportunity!

• What is a cash ISA?
• Should I get one?
• How do I get one?
• Check out our best buys

What is a cash ISA?

A cash ISA (Individual Savings Account) is essentially a tax-free savings account available to any UK resident aged 16 or over.

An ISA isn’t an investment in itself. It’s just a ‘wrapper’ that protects your savings from tax. Putting money in a cash Isa is just the same as putting money in a building society account or online savings account, but you’re wrapping it in a tax-free savings ‘bag’, so when you get your interest on the money you don’t lose any of it in nasty tax payments.

How much can I invest?

You can now put up to £5,340 into cash ISA each financial year – that’s 6 April 2011 to 5 April 2012. You can also put up to £5,340 in a stocks and shares ISA in the same tax year. If you’d like to put it all in stocks and shares, though, you can do that up to a limit of £10,680 in the tax year.

How does it work?

Once you put the money in you can take it out again, but you may not be able to put it all back into your ISA in the same tax year. This is because you can only put in money up to the savings limit for that type of ISA in any tax year. This rule applies whether the amount paid in is new saving or replacing amounts withdrawn earlier.

Once the money is in the ISA, however, you can transfer it directly into another ISA with another company, as long as that company lets you and you don’t exceed your annual allowance.

You’ll find that most banks will be letting the over-50s top-up their current ISAs with their additional allowance, but double check with your bank or building society.

Are all Cash ISAs the same?

No. Exactly like savings accounts you can get different types of cash ISA – easy access, fixed rate and notice accounts. And, in the same way as normal savings accounts, different types of cash ISA suit different people.

Easy Access ISAs – these are ISAs which won’t penalise you to withdraw your money should you need to. For this luxury though you’ll have to sacrifice the very best rates.

Fixed Rate ISAs – these are ISAs which guarantee the amount of interest you’ll receive for a fixed period of time. Generally the longer the term, the more interest you’ll receive. Remember though that with these ISAs you’ll be penalised for early withdrawals, and if you tie your money up for too long you might miss out if interest rates rise in the near future.

Notice ISAs - these are generally available as postal accounts and will allow you to withdraw money if you give a set amount of notice before you wish to do so.

Remember that you can transfer your cash between ISAs (as long as the new ISA you choose allows this). So, keep a close eye on the cash ISA best buy tables and transfer your money as and when you like to take advantage of the top rates. Just remember that some ISA providers may penalise you for withdrawing your cash early.

So, should you have one?

As with most things financial, it depends on your personal circumstances.

These are the reasons why you might not want to get a cash ISA this financial year:

You might want to put your full allowance into a shares ISA

This financial year (until 5 April 2012) you can put up to £10,680 altogether in ISA-wrapped investments either in two ISAs – £5,340 each in a cash ISA and a shares ISA or in one big shares ISA.

In the long term, investments in shares will give usually give you a bigger return. By ‘long term’ we mean at least five years. So if you’re planning to use your ISA allowance to invest for your future, we suggest you put that money into shares.

You might be planning to use that extra money to pay off all or part of your mortgage

This is a great idea, too. Paying off chunks of your mortgage means that you’ll be mortgage-free in much less time. You will save loads of money (like tens of thousands of pounds) in interest payments and your gains will be tax free.

When you pay money into your mortgage and save on interest you don’t get charged any tax on that saving, because you’re paying off a debt. In that sense, it’s similar to putting the money into an ISA.

You might have debts to pay off

Unless you’re being charged 0% interest on your debts, or have a very low interest debt like a student loan, there’s no point putting money into any sort of savings account until you’ve paid your debts off.

The money you make in interest on your savings will be more than wiped out by the interest you’re paying on your debts. Pay those off first and then you can start putting your extra cash into savings accounts and other investments.

However, the main reasons you should put money into a cash ISA are:

• You can make more money on your savings than you would in an ordinary savings account, as you don’t have to pay any tax on the interest.
• You can take the money out at any time if you suddenly need it and you’ll have pretty much the same amount of money you put in, plus a bit of interest.

Money in stock market investments can go up and down wildly in the short term and it’s possible that they could be down just at the moment you need to access your cash. So – if you find the stock market way too scary but you still want to invest some money, a cash ISA is a pretty decent bet.

How do I invest in a cash ISA?

Easy. You get it in the same way that you would set up any ordinary savings account:

You can now apply for most ISAs online. Alternatively, if you want a postal one or you’d rather open your ISA over the counter,  go to one of the branches of bank or building society concerned and ask to open up the cash ISA you choose.

An online cash ISA may be easier to pay into, withdraw from and manage. On the other hand, by making your money accessible only by walking into the branch in person, you’re reducing your chances of dipping into your savings without thinking.

You know yourself better than anyone so make an informed decision about how much you trust yourself with the money!

Top Fixed Rate ISAs

With these accounts the interest rates are guaranteed not to change throughout the fixed term (though you will be penalised if you take out any money during that term).

Best 1 year fixed rates:

• Barnsley Building Society pays 3.35% with its 1 year online fixed rate cash ISA. Minimum deposit is £100, and the account can be opened online. Transfers from other ISAs are also accepted.
• Northern Rock pays 3% for its Fixed Rate E-ISA. Minimum deposit is £500. Accepts transfers from previous years’ ISAs and can only be accessed online.
• NatWest’s 1 year fixed ISA pays 2.6%. Minimum deposit is £1,000 and you can choose from a 1,2 or 3 year fixed term. Withdrawals are not permitted during the fixed term.

Best 2 year fixed rates:

Best 3 year fixed rate:

Best 5 year fixed rate:

• The Halifax Fixed ISA Saver has 3 month-5 year terms available offering 4.40% AER, all on deposits of £500 or more. No additional deposits or withdrawals are allowed. Early closure is permitted but you will lose interest. For the Halifax Fixed Rate ISAs, interest is either paid on maturity, monthly on three and six month terms, monthly or quarterly on nine month terms or quarterly or yearly on a one to five year term.

Top Variable Rate ISAs

Instant access account

• Halifax ISA saver online offers 2.60% tax free/AER variable including 12 month fixed bonus of 2.35%. Minimum investment £1, transfers into the account are permitted as are withdrawals.

Notice accounts

• Principality BS is offering a 60-day Direct Account at 2.6% AER with just a £1,000 minimum deposit. The account is managed by post. The rate includes a 1.0% bonus for the first year.