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ISAs keep grubby hands of the taxman off your savings

DO you love the taxman more than you love your own family?

That's a question we advisers often ask our customers, when it comes to savings and investment products with a tax advantage built in.

In terms of savings, the tax-saving product we are often referring to is the Individual Savings Account or ISA.

If you don't have an ISA, and your money is in an ordinary savings account, the interest is taxed at the same rate as your salary - because interest is regarded as income, and income is subject to income tax.

This means that if you are a basic rate taxpayer, paying tax at 20 per cent on your wages, then you also pay 20 per cent on the interest in your bank deposit account. For every £10 of interest you earn, £2 is sent to the taxman before you even see the interest paid into your account. It's an invisible process, it happens behind the scenes, and many people aren't even aware of it.

Savings in an ISA, however, are sheltered from the taxman's grasp and you get to keep your full tenner. That's why an ISA is often referred to as a savings account with a 'tax wrapper' around it. The wrapper prevents the grubby fingers of the taxman from touching your money.

So why does the government give us the tax break that an ISA represents? Simply to nudge us to save, in the same way that we are given tax relief on saving in our pension. The chancellor positively loves to see us take advantage of them, as this means we are taking steps to build up our own financial security, setting money aside, either for a rainy day or for retirement.

The thing is, savings with a tax advantage are generous, but not unlimited. Each year you have a personal ISA allowance for the maximum you can save in these wonderful tax-free accounts.

This tax year, until April 5, you can pay a total of £11,520 into ISAs - but it's a matter of 'use it or lose it', because if you don't take up this year's allowance, it does not carry forward. you begin again on April 6 with next year's allowance, and this year's is gone forever. you can pay your whole allowance of £11,520 into a stocks and shares ISA. Alternatively, you can pay up to half - £5,760 - into a cash ISA and the remainder into a stocks and shares ISA. What many people do not realise, however, is that if you have one of each, you can put £1,000 into your cash ISA and the rest of your annual allowance, ie £10,520, into the stocks and shares model. In other words, only the cash ISA is limited to £5,760.

Well, there are 32 days from today until the end of this tax year. That's 32 days left to act, if you want to snap up your ISA allowances before they expire. You can do so either by setting up a brand new ISA, or, if you have one already, by topping it up towards or to your full amount.

Keep your tax to spend on your family, rather than leaving your money in a standard bank account, being nibbled away by the taxman.

There are two main types of ISA, the cash ISA and the stocks and shares ISA. They do exactly what it says on the tin - one keeps your money cash, the other invests it in the stock markets.

Well, the recently-appointed governor at the Bank of England, the very dapper Mark Carney, has so far maintained the base rate of interest at the historic low of 0.5 per cent.

This means that growth and returns on cash ISA savings, which are always related to the base rate, are pretty uninspiring right now, and look set to remain so until interest rates rise again. In fact, the best 'easy access' Cash ISA deals now available offer interest rates of around 1.75 per cent, although others do offer a little more if you agree to lock your money in for a set period.

These rates aren't going to knock the socks off anybody - but it's the tax-free setup that's attractive.

The stock markets ISA offers you a potentially better return than this, if you plan to leave the cash in there in the medium term, giving it 10 years or more to grow. Stock market investments have historically outperformed cash, in the medium to long term.

Incidentally, you can also open ISAs of both types for your children, using the 'Junior ISA'.

The moral of the story is: if you do have savings, think hard before leaving them in a standard bank account. You really should consider using your ISA allowances rather than exposing your money to tax. An independent adviser can fill you in on which is the best ISA for you, to start keeping all your hard-earned interest, right away.

And as they say at a certain super-market - every little helps. * Michael Kennedy is an independent financial adviser and pensions specialist, and can be contacted on 028 7188 6005.