As we’ve already mentioned, any interest earned in a Cash ISA is tax-free. If you save cash in a bank or building society account then the interest you receive will be net of tax ie the tax man will already have taken his chunk before the interest is credited to your account. For a basic rate taxpayer this means that you will pay 20% of your interest to the tax man and this increases to 40% for higher rate tax payers. If instead you held your cash savings in an ISA you would pay no tax on the interest.

Let's consider what you would get if you earned £100 interest on your cash savings in an ISA compared to a bank or building society account:

This said, you should consider the rates available on other savings accounts to check you aren't missing out on a better deal elsewhere even after taking into account the tax savings.

All basic rate taxpayers can earn £1,000 of interest each tax year without paying any tax on this interest. This may mean that their tax status will be the same whether or not they invest in a Cash ISA but there remain other advantages of investing in a Cash ISA.

Higher rate taxpayers can earn £500 of interest each tax year without paying tax on it.

To get the best out of your cash ISA, you need to make sure you’re always getting the best rate possible. Most Cash ISA providers will offer a high introductory rate to attract savers but this often drops to a less attractive rate after a year eg 0.1% - which is next to nothing (even after allowing for the tax saving)!

To make sure you're always getting the best rate on your cash ISA, follow this simple process:

1. Search the market for the best deal
2. Transfer your money if new deal is better
3. Save some more if you can afford to
4. Review to make sure you're still getting a good deal

There are lots of price comparison websites you can use to find out about the best Cash ISA deals.

Useful links:

• Moneysupermarket.com
• Comparethemarket.com

If you don’t think you’re going to need your money for a while, you may be able to get a better interest rate if you agree to making no withdrawals for a “fixed” period. You can still access your money if you really need it before the end of the fixed period, but you will probably lose any interest due. Alternatively, if you will need access to your Cash ISA savings on a regular basis, you may be better off with an ‘easy access’ Cash ISA which allows you to withdraw the money whenever you like.

Most Cash ISA accounts will provide an "introductory" or "bonus" interest rate. This means that the interest rate you get will reduce to a lower rate at the end of the “introductory” or “fixed” period. You should set yourself a reminder before any such rate is due to expire so you can review the market and move your Cash ISA to the best rate available.

If you have any old Cash ISAs, then check if you are allowed to transfer them into the new Cash ISA too (see below).

If you have any old Cash ISAs from previous tax years, then you can transfer these into your new Cash ISA account without using up your ISA allowance. This means you can get the best rate on all of your Cash ISA savings (as well as keeping life simple and only having a single Cash ISA account to keep track of).

To make the most out of your Cash ISAs, find a better rate and transfer your old Cash ISAs as soon as the "introductory" interest rate runs out. This is called being a RATE TART. You want to avoid any period where you are getting a very low interest rate on your money.

To do this you’ll need to find an ISA provider who accepts transfers. You’ll then need to fill out an ISA transfer form and send this to the new provider, from there, they will do all the leg work for you. Following this process ensures you retain your ‘tax-free’ status on the savings in your old ISAs.

WARNING!

You should NEVER withdraw your ISA savings with a view to then reinvesting them with your new provider as you will immediately lose all the tax benefits and, when you reinvest this money, it will eat into your new ISA allowance. Instead speak to your new provider and follow their transfer process.

For the 2023/24 tax year, every adult can save up to £20,000 into an ISA. This can be split between a Cash ISA and a Stocks & Shares ISA in any proportion.

It’s always a good idea to have some “short-term” savings. These can be used for lots of things:

• Emergencies (car breakdown, new washing machine etc)
• Lose job (tide you over until you find a new job)
• Bargain (gives you flexibility to go for any bargains)

Many people try to have enough rainy day saving so they could live for a short period, say 2-3 months, without any other income.

Overtime, you can get ALL your cash savings into a Cash ISA (assuming this is the most cost effective way for you to save).

Make a note of when your "introductory" period runs out. Mark it in your diary or smartphone. At that point, use the price comparison websites again to find out what the best deals are and start the process again.

It can seem like a lot of hassle. But, if you have £10,000 of savings, every year you have a choice.

This year do you want £300 interest on your money or £10 interest?

That's the difference between a 3% interest rate and a 0.1% interest rate. So, don’t let the banks get away with giving you a low interest rate! Be a RATE TART!

Use our calculator in the following section to see how much more interest you could earn in a year by transferring your ISA.

If you’re saving for the longer term (generally more than 5 years) then the returns you can achieve on a cash ISA are unlikely to keep pace with inflation, meaning that, over time the real value of your savings will go down. Investing in a stocks and shares ISA gives you the potential to earn returns above inflation and maximise your returns in the long term.

Investing for the long term is important here as there is more risk associated with investing in stocks and shares than there is investing in cash. Over long periods the stock market has consistently outperformed cash savings, however the value of your savings in stocks and shares will go up and down over time and can sometimes be worth less than if you’d invested in cash. By investing for long periods, you reduce the risk of getting less back than you put in and you give your investments the chance to recover when the value falls.

As with cash ISAs there are tax advantages associated with investing in stocks and shares ISAs in comparison to direct investment, however it is worth noting that some recent changes made by the government on interest and dividends that apply to investments not held in an ISA, means the advantages of ISAs have been reduced. This is especially the case for those with modest levels of savings or investments. Read on to find out more about these changes:

• Basic rate taxpayers can now earn up to £1,000 of interest each tax year outside of an ISA without paying tax. Any investments that pay interest remain completely tax free if held within an ISA and do not impact on the £1,000 interest allowance.
• In the 2023/24 tax year, every individual has a £2,000 tax free dividend allowance. However any dividends received on shares held within an ISA are tax free and do not impact on this allowance.
• Every individual has a capital gains allowance of £6,000 for tax year 2023/24. Any profit made when selling investments you hold in a stocks and shares ISA is free from capital gains tax and does not impact on the £6,000 allowance.

There are risks associated with investing in stocks and shares ISAs and you could get back less than you put in. But the following golden rules help reduce some of these risks:

1. Drip feed your money in – it can be very difficult to predict when will be a good time to invest. By investing a small amount on a regular basis you can reduce the risk of investing all your money at a time when prices are high.
2. Spread your investments – by investing in a range of different asset classes or a range of different companies’ shares you can reduce your exposure to the risk of a single company or asset class performing badly. Investing in this way will help you spread your risk and smooth out some of the significant ups and downs you may experience by investing in a single share or asset class.
3. Invest for long periods – your investments will go up and down over time but by having a long time period you are reducing the chances of getting back less than you put in and you’re also giving your investments time to recover from any falls in value.
4. Drip feed your money out – just like it’s difficult to know when to invest money it’s also difficult to know when is a good time to take your money out. You can avoid taking your money out on a day when the value is low by only taking out what you need and leaving the rest of your money invested. This will mean you don’t take all of your money out when prices are low and it also means you can invest your money for as long as possible.

There are costs involved with investing in stocks and shares ISAs and these will vary depending on what you invest in and the provider you use. There are a number of different charges you need to look out for with stocks and shares ISAs. These include:

• The Platform charge: This will be charged by the provider and may be a flat fee or a percentage of your funds. Depending on how much money you are investing this will determine which is best for you.
• Annual Management charge: This is based on the assets you choose to hold and will vary between different funds. It is usually expressed as a percentage of your invested funds.
• Buying/selling fees: These will be incurred whenever you buy or sell a fund. If you plan on making changes to your funds on a regular basis, a low trading charge will be important to you.
• Transfer out fee: This is the cost incurred if you move from one provider to another and is usually charged per fund so the more funds you have the more it will cost you. Some funds don’t apply a transfer out fee.

You should check the charges on any stocks and shares ISA to make sure you are not being overcharged, it’s important to take all the different charges into account. The following websites can help you do this:

• http://www.moneysupermarket.com/investments/stocks-shares-isas/
• http://www.moneysavingexpert.com/savings/stocks-shares-isas

You can transfer your cash ISA savings to a stocks and shares ISA and vice versa but if you do this you must be sure to do an ISA to ISA transfer and NEVER withdraw your ISA savings with a view to reinvesting them. If you do this it will eat into your ISA allowance for that tax year. Speak to your new ISA provider and ask for details of their transfer process.

Bear in mind that not all providers will offer the same funds so do your research before transferring to make sure the new provider can meet your needs.

The savings can be drawn without penalty from age 60, or before age 60 to buy a first home (worth up to £450,000 anywhere in the UK) at any time from 12 months after opening the account.

If you decide to use your LISA to buy your first home then the money will be paid direct to the solicitor when you buy and if the purchase falls through then your money will be returned to your LISA account along with the bonuses. The LISA is designed for a residential property so it is not intended for it to be used to buy a buy-to-let property. If you use it for buy-to-let the Government will reclaim the bonus money from you. After you’ve used your LISA in this way it isn’t closed, it is also designed for retirement saving so the idea is you can continue to save in this way after you’ve purchased your first home.

If you use your LISA for retirement savings then you can access the money after your 60^th birthday and use it in whatever way you like. You won’t pay any tax on the money you withdraw from a LISA (unlike a pension which is only 25% tax free), and you don’t have to take all of your money out at once, you can leave some invested.

The Government is also considering permitting early withdrawal for other life events. However early payment for any other reason would see the Government bonus and any interest earned on those bonuses being forfeited and an additional 5% charge applied.

In contrast to the current Help-to-Buy ISA, stocks and shares LISAs will also be available as well as cash only LISAs. You can have both a Help-to-Buy ISA and a LISA but you can only use the bonus from one of them towards buying a house (without incurring any penalties).

In addition to the bonuses paid into a LISA by the Government there are also tax advantages of investing in a LISA and these are the same as investing in either a cash ISA or a stocks & shares ISA depending on the type of LISA you choose.

The idea appears to be to get people into the habit of saving at an early age by encouraging them to save for a house deposit and then trusting they’ll keep on saving for their retirement.

You can currently save up to £20,000 each year into an ISA. So if you take full advantage of the new LISA you’ll still be able to contribute a further £16,000 towards other ISAs. It looks as though the Government views the LISA as an additional savings vehicle rather than an alternative to the current ISAs.

Whilst the current pension regime has many advantages to retirement savings over the new LISAs, particularly to higher rate taxpayers, LISAs also have their own advantages. Many basic rate taxpayers will be attracted by the LISA government bonuses while both the investment return and retirement income will be tax free. Currently only 25% of pension benefits can be taken tax free. This kind of arrangement may therefore be very attractive to some employees and should be considered alongside all other savings options to ensure they are making a fully informed choice.

You should bear in mind however that your employer will not contribute towards your LISA but they will contribute towards your pension. Depending on the level of contributions made by your employer this can add up to be a significant differentiator. There are also limits on the amount you can invest in a pension and a LISA in any tax year. Currently you can save £60,000 a year into a pension but only £4,000 into a LISA. More information on LISAs and the differences between pensions and LISAs, can be found here:

• http://www.moneysavingexpert.com/savings/lifetime-ISAs
• https://www.gov.uk/government/publications/lifetime-isa-explained

As mentioned above, the maximum you can save will be limited to £200 per month with the exception of the month in which you open the account when the limit will be £1,200. The limits apply to each months’ saving and are not cumulative. This means that if you don’t use your £200 limit each month (£1,200 in the first month) it will be lost and you can’t overpay in future months.

You need to pay in a minimum of £1,600 to receive the 25% bonus (£400 in this case) and there is also an overall maximum of £12,000 on which you will receive the 25% bonus. This means that the maximum bonus you can receive is £3,000. You can save more than £12,000 into your Help to Buy ISA and you will receive interest on the total amount but the top up will only apply to the first £12,000.

You’ll only receive the bonus when you buy your first home. The bonus will be calculated and paid directly to your mortgage provider so you will never actually have the bonus in your account.

If you’re buying in London you will only receive the bonus towards houses worth up to £450,000, this limit will be reduced to £250,000 for houses elsewhere in the UK. The bonus is available towards all houses worth up to the specified limits and is not restricted to new builds. You can use your bonus towards any type of residential mortgage and are not limited to Help to Buy mortgages.

Help to Buy ISAs are not intended to be used for Buy to Let properties. If you do use them for this purpose, the Government will seek to reclaim the bonuses granted from you. However, if your circumstances do change after buying a house to live in eg you decide to work abroad for a couple of years, the Government has confirmed that you would be able to rent out your property in these situations.

You should be aware that you cannot pay into a Help to Buy ISA and a cash ISA in the same tax year. So if you have paid into a cash ISA during the current tax year, you will need to wait until April next year before you can open a Help to Buy ISA, or you will need to look for a provider who allows 'split ISAs'. These providers have managed to put the Help to Buy ISA and cash ISA together in the same product, effectively allowing you to have both.

In deciding whether to pay into a cash ISA or a Help to Buy ISA you should take into account the following:

• The interest rates available on each type of ISA.
• The Help to Buy ISA top up.
• The amount you can save each tax year. For example, under the Help to Buy ISA the maximum you can save in any tax year is £2,400 (£3,400 during the first year) whereas you can save up to £20,000 in a cash ISA for the 2023/24 tax year.
• The new tax free interest limits introduced from April 2016. More information is available here.