Tax-free savings

The end of the tax year is fast approaching (April 5th), but you still have time to take advantage of your tax-free savings allowance for 2011/12 if you haven't got round to it yet.

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What am I allowed?
Each adult is allowed to put £5,340 into a Cash Isa (Individual Savings Account) per tax year, but that is the maximum figure and many accounts can be started from as little as just £1.

This is part of our overall annual Isa allowance of £10,680 - the remainder of which has to be comprised of a Stocks and Shares Isa. You can put the entire amount in a Stocks and Shares Isa if you wish, or any combination up to the Cash Isa limit.

In the past products were divided into Maxi and Mini Isas, but this was simplified in 2011 so that now there are only Cash Isas and Stocks and Shares Isas.

There is a further complication in that anyone over the age of 16 can have a Cash Isa, whereas only those aged over 18 can have a Stocks and Shares Isa.

Annual allowances are now pegged to the Retail Price Index, and so will rise (or fall) along with the cost of living.

So how do Cash Isas work?
In the usual course of events we are all taxed on the interest we gain on our savings, to the tune of 20 per cent for basic rate taxpayers and 40 per cent for higher rate taxpayers.

Any money invested in Isas, however, remains untouched by the taxman for the duration that it remains in the account.

If you can manage to squirrel away a decent amount each year, you'll soon end up with a nice little tax-free nest egg.

Sometimes Isa providers allow savers to transfer the balance of their Isa from another provider into a new account, sometimes they don't. Rates on offer can vary considerably and it's important to pay attention after choosing an Isa - because crafty providers have been known to subsequently lower the rates to as little as 0.1 per cent!

How do Stocks and Shares Isas work?
These are a little more complicated, but the basics are that they are used to purchase share-based investments such as unit trusts and OEICs.

You will NOT pay tax on capital growth in stocks and shares Isas, but if you are a basic-rate taxpayer then you WILL pay the usual 10 per cent tax on any dividends earned.

However, if you are a higher or additional-rate taxpayer then you WILL NOT pay any further tax on dividends. Higher and additional rate taxpayers usually pay 32.5 per cent or 42.5 per cent tax respectively on dividends.

Needless to say, Stocks and Shares Isas are more popular with higher and additional rate taxpayers.

Capital gains tax is usually payable on gains of more than £10,600 from the sale of shares and certain other assets in a financial year, however this does not apply to gains from Stocks and Shares Isas.

What are the best deals?
With the deadline approaching the deals seem to change daily, so the best thing to do is check the price comparison and consumer-advocacy websites that monitor the rates on offer.

What do you think? Is the Isa system fair? Comment below...