Use it, or lose it

If you have not taken out an Isa yet this tax year, you have less than a month to do so. Anyone who hasn't opened an Isa by midnight on April 5 will lose their 2005-2006 tax-free allowance and effectively be pouring money down the drain.

Isas are a no brainer if you have any money in savings because any growth is tax-free. Yet millions of people lose this tax break every year: More than 70% of people have some money in savings but nearly half do not have an Isa, according to research by Alliance & Leicester (A&L). The main reason for this lack of take-up appears to be confusion.

A lot of people think that Isas are stock market investments but that is not necessarily the case. Every adult can invest up to £7,000 in an Isa each tax year. You can invest the full amount in a maxi Isa which invests in stocks and shares, usually through a managed fund such as a unit or investment trust. Alternatively, you can take out two mini Isas. Up to £3,000 can be invested in a mini cash Isa and you can put as the remaining £4,000 in a mini stocks and shares Isa.  So even if you do not want to put money into equities it is still worth opening an Isa and using your cash allowance.

Cash Isas are like normal savings accounts - many allow you to access your money instantly and you do not have to invest the full £3,000. A lot have minimum investments of just £1. A&L has the best rate at the moment. Its Direct Isa Issue 2 pays 5.2%. Alternatively, Halifax's Isa Saver Direct and First Direct's mini cash e-Isa pay 5%.

A basic rate taxpayer will save £30 a year in tax if they hold £3,000 in an Isa, assuming it pays 5%. Those in the top-rate tax bracket will save £60 a year. A higher rate taxpayer who had made use of the full £3,000 allowance every year since Isas were introduced in 1999, would have saved £1,680 in tax over the last seven years.

And while you are thinking about taking out an Isa this year before next month's deadline, why not think about next year's too. There are some great regular savings accounts available at the moment that run for 12 months. A&L and Barclays are both offering accounts paying 10% interest. HSBC has a regular savings account paying 8%. However, these accounts are only available to current account customers - and A&L's is only open to new current account customers. If you do not bank with thses banks and don't fancy switching your current account, Halifax has a Regular Savings account paying 7% and this is available to anyone.

These accounts require you to deposit money every month for a year and you can pay in up to £250 a month. If you deposit the full amount you will have accumulated £3,000 plus interest by the end of the 12-month term - so that's next year's Isa sorted and you will have a bit extra left over to either spend or move to a standard savings account.

Comments

[My voice]

I think the big issue is why the Government hasn't risen ISA limits in line with inflation. They've been at £7,000 since 1999. This is yet another insidious tax on the hard working middle classes.

The Government should increase the ISA limits, and really reward those who want to save for the future.

[Barry J. Webb]

I have not yet forgiven the Chancellor for withdrawing the tax credits from PEPs, ISAs, TESSAs and Pension Funds, all of which were allegedly tax-free investments. I would not trust Brown as far as I could throw him, and dread his becoming Prime Minister. He should instead be inflicting his deviousness on the Scots.

[SimpleUnbiasedFacts]

What charges apply to the ISAs mentioned in the article? Would the charges consume part of the tax savings quoted?

[ivan clark]

I took your advice on questioning the Woolwich exitfee for mortgage early repayment and wrote to complain. firstly I was sent standard letters blah blah etc then an offer of £80 off the penalty as a goodwill gesture and when I failed to speak to them(due to being too busy not laziness) I was finally given a full refund which I was very pleased with with an explanation it was to just get rid of me and I was lucky , actually I did feel lucky but lucky to have read The Times article ! . So all other people out there don't fall at first hurdle and take that £80 cheque !it pays to fight it out. I was perturbed that some of your readers accepted that £80 payment and were bought off so easily. So all others be warned. It might not be much but at least its a meal out !. Good luck to others in the same boat.

[R J Albert]

My wife and i invested £14000 each in a barclay [legal and general]maxi isa sept
2005. This is a monthly income isa.
I have just been informed it s now worth £13056.
Barclays financial advisor can not tell me why this has happened.
The account isL&G Barclays income portfolio trust [inc]