Have you used your ISA allowance yet?

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By Mark Mitchell
Know Your Money Editor

An ISA (individual savings account) is an opportunity for tax-free savings and for savvy savers, the fact that returns are tax-free could prove to be a big advantage, as money held outside the safety of an ISA are liable to income or capital gains tax.

Therefore, those of you with ISAs could be wise to take advantage of the opportunity to use your allowance before the end of the tax year - and the ISA deadline - on April 5th.

Creating a nest egg of the savings that you currently have available to you now could allow them to grow to the most beneficial amount in the future.

From the new tax year additional changes are taking place, meaning that savers could be able to benefit from their ISAs even more.

Is it worth investing?

Currently, the ISA allowance is £7,200 - £3,600 of which can be invested into a cash Isa - and for over 50s (or anyone who will be 50 on or before April 5th 2010) it is £10,200 - £5,100 of which can be invested into a cash ISA.

According to research by Moneyfacts.co.uk, the lowest easy access ISA from Nationwide has a current rate of 0.25 per cent, followed by Halifax at 0.3 per cent.

The website suggests that the best value easy access ISA stands at 2.53 per cent and is offered by Santander.

Rates at this level may not seem particularly preferential to savers as they may at present be able to earn more from a taxed savings account.

However, when asked if it is worth getting an ISA at all, considering the top variable ISA currently pays less than the best standard savings account, Andrew Hagger, spokesperson for Moneynet, said: "Yes it is, but the differences in returns are quite negligible. For instance, if you had the best variable ISA with Standard Life, at 2.5 per cent, you compare that against the best instant access account of 3.01 per cent with Scottish Widows.

"It is worth remembering, however, that if you take out an ISA this year, you then ring fence your money from the tax man next year as well. Because the interest rates are currently low, the taxation part of that is also low. Then when the rates pick up, so will the benefits of an ISA.

"If rates were to rise back to three and four per cent then you are looking at a much better differential between the two. So while I can understand why ISAs are not good value for people at the moment, you perhaps have to take a long-term view of it."

Benefits ahead?

From April 6th, it is not just those aged 50 and over who will be able to benefit from the higher allowance as it goes up to £10,200 for everyone.

Therefore, savers could wish to make the most of the allowance they have this year and then start to think about next year.

Fair Investment's Rachel Mason said that investing in an ISA in the run up to Valentine's weekend could mean that couples could end up being able to buy something much more romantic than a box of chocolates.

She said: "Based on this year's limits, a couple who both invest their entire cash allowance into an instant access account like the Scottish Widows E-Cash, which currently has a rate of 2.10 per cent, could earn £151.20 between them in a year and using next year's limits, this would be £214.20."

For those looking to invest into a stocks and shares ISA and willing to take an element of risk with their cash, the potential returns could be much higher.

Fair Investment stated that if a couple both invested their full allowance into an investment ISA like the Barclays Wealth Regular Income Bond - a six-year structured investment plan currently offering a 6.50 per cent income yield - this could mean a joint income of £936 a year based on the current limits.

With this in mind, consumers could consider making full use of their allowance, because it cannot be rolled over into the next tax year.

To compare ISA products from the UK's leading providers click here.

Important Notice
This guide is intended for general information only and is not intended as, and does not constitute, any form of advice, recommendation or endorsement by us of any particular product(s) or services and you should rely on your own further research and professional advice in relation to your specific requirements and circumstances before purchasing any products or services. Use of this guide is subject to the Terms of Use of the KnowYourMoney site.