Cash in on tax-free saving

If you're holding money in a savings account and you haven't opened an Isa you should consider doing so, according to financial advisers, but time is running out to use this year's £3,000 tax-free allowance.

Martin Bamford of IFA Informed Choice says the potential saving for a basic rate taxpayer may not seem significant at first but will build up over time. "For a basic rate taxpayer who is getting 4.5% on their savings account anyway, the ability to put £3,000 in an Isa isn't much of a deal. It means a tax saving of £27 a year. For a lot of people this can be achieved by ensuring they shop around for a competitive savings rate," he says.

"However, when you start making use of a cash Isa every single tax year, they make sense. We are starting to see clients with £9,000 or £12,000 each in cash Isas now, who are saving more significant levels of income tax." Those who pay tax at the higher rate will also make more significant savings. For them the tax saving on £3,000 invested at 4.5% is £54 a year.

The deadline for using this year's allowance is midnight on April 5 but don't assume that banks and building societies will accept late applications. One of the best paying accounts, Alliance & Leicester's Direct Isa Issue 2 with a rate of 5.3%, will not accept applications online beyond noon on March 29, so you should move quickly when you have decided which Isa you want.

Rate hunting
Most savings institutions offer Isas, but don't just go straight to your bank to buy one. Some of the best rates come from building societies and smaller banks. Many of the best paying accounts can be opened for as little as £1 and offer easy access to funds, but before investing you should check whether the rate includes a bonus or is payable only for a limited period. Look too at what penalties, if any, will be charged for withdrawals and whether you must give notice to move or withdraw your money. And bear in mind that some accounts only accept deposits of the full £3,000 annual allowance.

The highest rates tend to come on internet-based, telephone and postal accounts, such as Alliance & Leicester's Direct Isa offering. Other options are fixed rates and Isas that move in line with the bank base rate. Saffron Walden building society, for example, has a mini cash tracker Isa paying an introductory rate of 5.3%, however it requires 30 days' notice for withdrawals and can be opened only with a £3,000 deposit.

There are a handful of regular-saver Isas but savings and investment website Moneysupermarket says the rates are not particularly attractive and a better strategy is to save with a standard regular-saving account and deposit the money in an Isa next year. Customers who have a current account with Alliance & Leicester and Barclays can earn 10% on regular savings; Halifax offers 7% to all.

In a fix?
First Direct is paying a fixed rate of 5% on its mini cash e-Isa until September 1 this year, falling to 4% after that. Northern Rock is offering 4.6% for one or four years but investors who need to get their money out will lose 60 or 150 days' interest respectively.

Advisers have mixed views on fixed rates. Nick Bamford of Informed Choice says: "If you have an expectation of falling interest rates in the near future, then fixing your cash Isa is worth looking into." But Philippa Gee of IFA Torquil Clark says: "I would tend to opt for a competitive variable rate and divert some of my money into equities, providing the risk is acceptable."

Many providers will accept money transferred from other Isas but check for exit penalties on the account your intend to close. Stuart Glendinning of Moneysupermarket recommends reviewing your cash Isas once a year. But, he warns, don't withdraw your money; arrange with your existing provider to transfer it, otherwise the fund will lose its tax-free status.

Part one: Should you take a risk with your Isa?
You can compare cash Isas here.