A Cash ISA should be the first consideration for any UK-based saver, as they allow you to deposit a set amount each year, and earn interest on it tax free.
The amount you can save changes every financial year, but currently it stands at £3,600 tax-free for under fifties, and £5,100 for those over fifty. However, this is due to change in April 2010, to allow all savers to be eligible for a cash ISA to deposit £5,100 tax free.
The main question people ask when first introduced to a cash ISA is how do they differ from standard savings accounts, then? The answer is actually very simple. Those saving in a standard savings account will pay 20% of interest earned to the taxman each year, and for higher earners that figure jumps to 40%.
A Cash ISA, however, lets you keep every penny of interest you've earned, and as a result it's very rare that an ISA will pay less interest than a regular saver. Don't be fooled by interest rates either although a regular saver account at 3.5% AER would earn more gross interest than an ISA at 3%, the interest earned in the ISA would not go to the tax man. A higher rate tax payer would need a regular saver account with an interest rate of 5% to earn the same amount.
Another commonly held belief is that an ISA needs to be held for a specific period of time before the saver will benefit from the tax free savings: Providing the terms of the product allow it and many do you can withdraw money without losing tax benefits on the rest of the money in the account.
As most readers are likely aware, interest rates are fluctuating wildly at the moment, and this means that keeping abreast of what providers are offering and possibly even switching account providers is something that you should be prepared to do. Changing an ISA is not quite as simple as switching a standard savings account however; if you were to withdraw all the money from an ISA, you would immediately lose all the tax benefits. As a result of this, you should complete an ISA transfer form with your new provider, who will then communicate with your old provider and get the accounts transferred, keeping your tax benefits intact. As a note; an ISA from a previous tax year can be split between cash and shares ISAs, whereas one taken out during the current financial year cannot.
As the years have gone on, ISAs (and their predecessors) have become less and less complex, although they have also changed names. For example, a few years ago you could take out a Mini ISA or a Maxi ISA- these have now been abandoned. If you had a Mini ISA, the balance will have been transferred to a cash ISA, and if you had a Maxi ISA the cash element will now be in a cash ISA, and the shares amount in a stocks and shares ISA. Similarly, if you had a PEP, this will have been converted into a cash ISA (but check the interest rate, they tend to be low), and a TESSA will have been converted to a stocks and shares ISA.
Before committing to a cash ISA account, make sure you shop around first. As shown above, Cash ISAs can make a huge difference to your savings, so finding the right one with a good interest rate is paramount.
Written by Guest Author: Moneysupermarket.com