How do the Cash Isa's Work

While the annual ISA allowance is £7,200, only £3,600 may be put in cash. The best route for this is what's called a Cash ISA; these work just like normal savings, except the interest isn't taxed.

Usually, a basic rate taxpayer pays a fifth of their savings interest in tax, a higher rate tax payer two-fifths. Turning this around, it means basic rate taxpayers earn 25% more interest at the same rate in a cash ISA, and higher rate taxpayers 66% more!

There are a few oft confused ISA facts:

• Money may be withdrawn at any time without losing tax benefits.
  
  Yet once the money's withdrawn, it can't be returned. An example should help: Put £2,400 in and there's £1,200 of this year's allowance left. Withdraw £1,000 from it, and you may still only contribute £1,200 more. The fact you've withdrawn the money doesn't change anything.
  
  
• You get a new ISA allowance each tax year.
  
  Each tax year (6 April until the next April 5) everyone aged 16 or over gets a new ISA allowance. If you don't use it, you lose it. Yet if you do put the cash in, you can keep it in there, tax-free for as long as you like. And as soon as the next tax year starts (i.e., 6 April) you can put a whole new £3,600 in too.
  
  
• Only one Cash ISA per year.
  
  You can only have a Cash ISA with one provider in any tax year – you can't split it. However you can hold cash-ISAs from different years with different providers.