A to Z of Isas

A is for allowance. Every adult in the UK is allowed to invest up to £7,000 in Isas in each tax year. The whole sum can be invested in a maxi Isa, or they can hold a combination of £3,000 in a mini cash Isa and £4,000 in a mini stocks and shares Isa.

Banks and building societies are the main providers of mini cash Isas; many also offer mini stocks and shares Isas and maxi Isas. Stocks and shares Isas are also offered by fund management groups.

Cash Isas are the safest home for your Isa allowance as they operate in the same way as ordinary savings accounts. You can compare the rates on cash Isas here.

Dividends earned on shares held in stocks and shares Isas - either directly or in funds - were originally tax free, but are now subject to tax at 10%. This means only higher-rate taxpayers save money.

Not many companies sell ethical Isas but there are plenty of green funds available which can be held in an Isa wrapper. The Ethical Investment Research Service has information on what makes a fund ethical, together with a fund selector tool - just make sure you tick the Fund Wrapper box before you search.

Funds are a popular choice for Isa investors who want exposure to the stock market but don't want to choose individual stocks and shares. If you are buying funds you can often get a discount on charges if you buy through an IFA or using a website like Fidelity's Fundsnetwork or Cofunds.

Growth on funds, shares or cash is not subject to capital gains tax, unlike investments held outside an Isa wrapper. On the flipside, this means losses inside the Isa are not tax deductible.

Cash Isas tend to offer slightly higher interest than normal savings accounts. Currently the best-buy instant access cash Isa has a rate of 5.20% - including a 0.7% bonus - while the best-buy instant access account outside an Isa pays 5.01% - including a 0.71% bonus. Factor in the effect of tax on the rate outside an Isa and the difference is even bigger.

Insurance Isas were phased out last year and the £1,000 allowance was added to the stocks and shares element. You can still hold with-profits funds in an Isa, though - they are now part of the stocks and shares element too.

You can't hold an Isa in joint names - the allowances are for individuals. However, couples should make sure that between them they are making the most of their allowances.

You can't open an Isa for your kids either. Cash Isas are available only to over-16s, while stocks and shares Isas are available to 18-year-olds who are legally old enough to buy equities.

Losses are possible in a stocks and shares Isa: your money is only protected from the taxman, so if you pick the wrong investment you could see the value of your holding fall. While losses outside an Isa can be offset against capital gains to reduce your tax bill, those on investments inside the Isa cannot.

Make sure you know if you are signing up for a maxi or a mini Isa. This is only an issue if you are buying stocks and shares - either directly or through funds - where both types are available. If you sign up for a maxi Isa you won't then be able to take out a separate cash Isa - you may be able to hold money in a deposit account, but only if the Isa provider offers one.

To sign up for an Isa you will need to give your national insurance number, so the revenue can check that you have not opened more accounts than you are allowed to.

Some providers will be open until midnight on April 5 to accept the last Isa applications of the tax year, but don't rely on the Isa you want being available right up until the deadline. If you have made your choice it's wise to apply sooner rather than later, so there is still time to put things right if you have made a mistake on your form or failed to send the required information.

Peps - personal equity plans - were the forerunners of stocks and shares Isas, allowing investors to hold stocks and shares in a tax-free environment. Peps were closed to further subscriptions from April 6 1999, when Isas were introduced.

Not all funds and shares can be held in an Isa, for example shares in companies listed on the Alternative Investment Market (Aim) do not qualify. However the list of qualifying investments has grown so, for example, you can now hold sharia-compliant accounts in a cash Isa.

It's important to review your Isa holdings each year, rather than simply opening a string of different accounts. This way you can make sure that your portfolio is well balanced and that you are still investing in the best funds or savings accounts. If you want to move money into a better account this is possible, but you can't do it yourself: you must ask your existing Isa provider to transfer the money so it is not seen as a new investment made in the current tax year. You cannot move money from a cash Isa to a stocks and shares Isa, or vice versa, but you can transfer holdings in a mini stocks and shares Isa to a maxi Isa, and vice versa.

Stakeholder Isas were introduced last year to replace Cat-standard Isas and they can be cash Isas or stock market linked investments. The stakeholder rules limit the minimum investments a provider can ask for and impose rules on how often money can be withdrawn and how much providers can charge. A full rundown of the rules and a list of the, few, stakeholder Isa providers can be found on the government's stakeholder website.

When Isas were launched Tessas were phased out and investors were given the chance to roll their savings over when they matured into a Toisa - Tessa only Isa. Unless you are tied in by penalties on the Toisa you have chosen, you can move your money between accounts to make sure you are getting the best rate. You can compare Toisa rates here.

Use it or lose it. You can't carry your Isa allowance over to the next tax year, so once it's gone it's gone. According to Bradford & Bingley while 61% of the population have some sort of savings account, only a quarter are holding money in an Isa. This means many people are paying tax unneccessarily.

Most companies accept virtual applications; many even incentivise savers to apply over the web. Alliance & Leicester, for example, pays a rate of up to 4.75% on branch-based Isas and 5.2% on its direct Isa for phone and internet customers.

It doesn't matter when in the tax year you pay your money in. If you find yourself with a windfall to invest at the end of the tax year, you can use up this year's Isa allowance on April 5 and use next year's allowance on April 6. Alternatively you could make steady payments throughout the year - the tax benefits are the same, regardless of when you put the money in.

Expats aren't allowed to open or invest in Isas, but they can keep any that they might have opened before moving overseas and continue to enjoy the tax benefits. And if they move back to the UK they can start paying into the account again.

Isas will prove a valuable addition to your portfolio, providing you choose top-performing funds to hold them in. Someone investing £7,000 in the Merrill Lynch Gold and General fund five years ago and benefiting from a 353.7% return (according to figures from Trustnet) could face a capital gains of over £6,500 if they sold their holding today; if they had held the fund in an Isa their CGT bill would have been zero.