But saving money from the taxman isn't the only reason you should take advantage of ISAs - here are 10 reasons why you should make the most of this year's allowance.
1. If you don't use it, you'll lose it Your annual ISA allowance can't be rolled over to next year, so if you don't use it before the end of the tax year, it will be gone for good. You can invest �10,680 into an ISA this year, and returns are free of income tax and capital gains tax. Next tax year, which starts on 6 April 2012, this limit will increase in line with inflation to �11,280. Your annual allowance can be split so half goes into a cash ISA while the other half can be invested in a stocks and shares ISA. Alternatively, your full allowance can be invested in a stocks and shares ISA. 2. ISAs benefit both basic and higher rate taxpayers Many people assume that ISAs are only useful for higher rate taxpayers. But basic rate taxpayers who have taken advantage of their full cash ISA allowance each year since they were introduced in 1999 would be over �3,800 richer than if they had invested an equivalent sum in an easy access savings account, according to analysis by MoneySupermarket. 3. You can cut down on paperwork If you are one of the more than 9million people in the UK who has to fill out a self-assessment tax return each year, you'll know what a hassle it is getting all the relevant statements and bits of paper together. As ISAs are tax-free, they don't have to be declared on your return, so that's one bit of paperwork you don't have to worry about. 4. They are flexible ISAs are extremely flexible. Most accounts, unless you have chosen a fixed rate ISA, allow you to get access to your money whenever you want. This makes them a good option for people looking for decent returns, but who want to be able to make a withdrawal if necessary. ISAs can be particularly useful for retirement planning as, unlike a pension, you can get your hands on your money whenever you need to. Current top easy access ISAs include the Cheshire Building Society's Direct ISA. Interest on the deal was recently raised to a joint market-leading 3.50% annual interest tax-free. However, the rate includes a steep bonus of 2.50% which is only payable until the end of September 2013, at which time you'll need to move your money if you want a better rate. Cheshire's account can be opened with a minimum investment of �1,000 but does not permit transfers in. If you want a 'clean rate' ISA, which doesn't include a short-term bonus, Aldermore has just launched a deal that pays 3.15%, which can be opened with �1,000 and allows transfers in from other ISAs However, it requires a 60-day notice period to access your cash and savers only have until Monday, 26 March to open an account. For true easy access deals, Virgin pays 2.85% annual interest tax-free as a clean rate on both transfers and new ISA money. The account permits savers to make unlimited withdrawals without notice and allows transfers in from other ISAs. The M&S Advantage Cash Isa pays an even more generous 3.00% annual interest tax-free on a minimum investment of �100, and again this rate does not include a bonus. 5. You can fix for higher returns You can earn even higher tax-free returns by locking into a fixed rate ISA. Remember however, that fixed rate ISAs don't generally allow withdrawals, so you must be certain you can afford to leave your money untouched for the term of the account. BM Savings, for example, has just launched a new market-leading two-year fixed rate ISA which pays 4.05% for �500 investment and accepts transfers in. This is marginally higher than Santander's two-year fixed rate major ISA priced at 4.00%, although this account pays an additional 0.10% annual interest if Rory Mcllory wins an eligible golf Major. The Santander account can be opened with a minimum investment of �500. 6. You don't need a large lump sum to invest Many cash ISAs can be opened with as little as �1, so you don't need to have thousands of pounds in the bank to earn returns tax-free. If you want to invest in stocks and shares, most funds will accept monthly contributions starting from either �25 or �50. 7. They don't affect age-related allowances The personal allowance is the amount of taxable income you can receive before you start to pay income tax. For those aged 65 and over, the allowance is �9,490 a year. If your income is above �24,000, for every �2 of income you lose �1 of the additional age related allowance, but income from ISAs doesn't reduce these allowances. However, after the Chancellor, George Osborne's announcement in the Budget about age-related allowances, this perk could be short-lived. You can read more about this in our Budget at a Glance article 8. You could become an ISA millionaire Stocks and shares ISAs offer the potential for you to earn higher returns in return for accepting a higher level of risk. If you make use of your ISA allowance every year to invest in equities, you could end up with a tax-free savings pot worth over �1million. According to research by Fidelity Investments, if an investor started in 2012 with the current ISA allowance and this increased with inflation each year by 2.5% onwards, they could be an 'ISA millionaire' with a savings pot worth �1,021,927 after 29 years. This assumes annual growth of 5%. Bear in mind that whether or not you should take out a stocks and shares ISA will depend very much on your attitude to risk, and you should always seek professional independent financial advice first. 9. If you choose to invest in stocks and shares, you can put your money into more than one fund You don't have to invest your stocks and shares allowance in one fund alone if you invest through a fund supermarket. As their name suggests, fund supermarkets allow investors to effectively 'shop' online for funds from several managers, enabling them to split their ISA allowance for this tax year between a range of different funds. 10. You can transfer your existing ISAs If your ISA savings aren't performing as well as you'd hoped, you can switch to a different provider. You can also transfer from a cash Isa to a stocks and shares ISA, but not the other way around. The best easy access cash ISA for those looking to transfer existing ISA savings is currently NatWest's e-ISA, which pays an impressive 3.50% on a minimum investment of �30,000. A lower rate of 3% is paid on balances between �1 and �9,999, while those with balances between �10,000 and �29,999 earn 3.25%. These rates include a 1.00% bonus for the first year. For those with smaller balances, Santander's Direct ISA Issue 9 account pays 3.30% annual interest tax-free, and can be opened with a minimum investment of �2,500. If you are prepared to tie up your savings for a while, then Halifax's five-year ISA Saver Fixed account, paying 4.50% also accepts transfers in.
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