Individuals can invest up to £7,200 a year in total into an Isa, with £3,600 in a cash Isa, and the remainder in a stocks and shares Isa, or the full £7,200 into the stocks and shares Isa. The cash Isa is tax-free, while the stocks and shares Isa is tax-efficient, because there is some tax on dividends deducted at source following a change in the rules.

On April 6, 2008  the original mini, maxi and Tessa-only Isas were abolished. Instead there are now just two types of Isa account: a stocks and shares Isa and a cash Isa.

Cash Isas work like any other savings account, the only difference being that the interest is not taxed. If you are a taxpayer, it is therefore well worth utilising as much of your Isa allowance as possible each tax year (the tax year runs from April 6 to April 5). Even if you don’t have much in savings, many cash Isas are easy access accounts with no withdrawal restrictions so you can get at your money at any time.

However, if possible it is advisable to keep your savings invested in an Isa for as long as possible because you lose the tax-free status on that money as soon as it is withdrawn from the account.

Things to watch out for:

• Some cash Isas do restrict withdrawals. Notice accounts, as their name suggest, require you to inform the provider that you want to make a withdrawal a certain number of days in advance, typically 30, 60 or 90. If you opt for a fixed rate Isa you will probably not be able to access the money during the fixed-rate term. It could be worth relinquishing some flexibility however, as you may be able to earn a higher rate of interest if you opt for a fixed term or notice account.
• Many of the leading easy access rates include introductory bonuses. You may therefore need to move to another account, once the bonus period ends.
• You can move money from one cash Isa to another without losing the tax-free status. However, you need to be careful: the transaction must be a transfer. If you close the account it will be classed as a withdrawal and you will lose the tax-break on those funds. It is worth noting that some cash Isas do not accept transfers.

Source: Moneysupermarket and MyMoneyDiva