Protect your pounds from Prudence

Chancellor Gordon Brown will have to raise taxes by £11bn to pay for his spending plans, the Institute for Fiscal Studies said today. With the long arm of Mr Brown stretching further and further into your purses now is the time to put your savings into the only place that is free from his prying eyes.

Step forward the ISA

The Independent Savings Account (ISA) is a a tax-free scheme designed by the government to encourage people to save money. Under the rules of the Isa one person can invest up to a maximum of £7,000 in any tax year (which run from April to April), completely free of tax.

There are three main components of offer - cash, shares and insurance - and exactly how that £7,000 is broken down is up to the individual concerned.

Maxi Isa

A maxi Isa allows investors to put the maximum £7,000 into shares if required, but it can also be broken down to allow up to £3,000 to go into cash savings and £1,000 into insurance.

Mini Isa

A mini Isa enables investors to split up their money. You can have a mini for all three parts of your Isa (either with the same provider or three different ones). The limits are £3,000 in cash, £3,000 in shares and £1,000 in insurance. But you don't have to buy three minis - you can just have the one or two if you want.

No single investor can buy both a mini and a maxi Isa in the same tax year.

Cash or shares?

Importantly, a cash Isa allows savers to put away their money to accrue interest just like it would in an ordinary bank or building society account, but with the advantage if being tax-free.

A shares Isa will invest in the stock market, so although any gains the money makes will not be taxed, the capital will also be exposed to the ups and downs associated with stocks.

Cash Isas can be a useful place to put money in order to gain interest, avoid tax and have easy access at relatively short notice. Shares Isas should, like all stock market investments, be considered a long term investment.

Until next time,

BW