Most people can earn some interest from their savings without paying tax, and most UK taxpayers will be entitled to the Personal Savings Allowance

The tax year runs from April 6 to April 5 the following year and if you are paying the basic rate of income tax on your salary, or income then you can earn up to £1,000 in interest on any savings.

Once you earn more than £50,270 you become a higher rate taxpayer and pay 40% tax on your income. Once you earn this amount you can only earn £500 tax-free on any savings interest.

Some savers can earn £5,000 of interest but you will need to be earning less than £17,570.

Every £1 of other income above your personal allowance – which is £12,570, reduces your starting rate for savings by £1.

So if you £16,000 of wages and get £200 interest on your savings. Your Personal Allowance is £12,570. It’s used up by the first £12,570 of your wages.

The remaining £3,430 of your wages is £16,000 minus £12,570 and reduces your starting rate for savings by £3,430.

Your remaining starting rate for savings is £1,570 £5,000 minus £3,430 and means you will not have to pay tax on your £200 savings interest.

Savers who want to earn more money tax free have a yearly allowance fo £20,000 but you will need to open up an ISA, or individual savings account.

There are several different type of ISA, cash, shares, Lifetime (LISA) and even one for children known as a Junior ISA.

HMRC recently clarified an important yearly allowance that applies to anyone with a savings account. A customer got in touch with a question about ISAs as they had recently opened a new account.

They queried: “In the past financial year I opened a One Year Fixed Rate cash ISA and a LISA (different banks). Can I also open a stocks and share ISA in the same financial year and pay it to all of them, but not totally over £20,000.”

In response, the tax authority spelled out how the yearly limit works for ISA savings. The group said: “Every tax year you can save up to £20,000 in one account or split the allowance across multiple accounts. The tax year runs from 6 April to 5 April.”

Last year the government changed the rules on ISAs. Previously you could save into one of each type of ISA, but now you can save into multiple of each type.

This does not include Lifetime ISAs or Junior ISAs, as you can only subscribe to one for each tax year.

People under 18 can also only subscribe to one cash ISA in any tax year. The taxpayer had a follow-up question for HMRC, asking them to clarify: “Can I open a cash ISA, LISA and stocks and shares ISA in the same financial year?”

The tax body said in reply: “Yes, as long as you don’t exceed your £20,000 ISA allowance in any given tax year.” ISAs are an attractive savings option as you do not pay tax on any interest or growth on investments wrapped up in an ISA.

The Lifetime ISA may be a good choice if you are saving up for your first home, as any deposits into the account get a 25 percent bonus. You can save up to £4,000 a year into a Lifetime ISA, meaning you could up to an £1,000 bonus.

At the time of writing, you can still get a rate of five percent with the top-paying easy access cash ISA, with Moneybox. If you want a fixed rate, you may want to act now as the base interest rate has fallen in recent months, prompting banks to drop their rates as well.

Savers have just over three months to make the most of this year’s tax-free savings allowance.

There are two main types of Isa – ones that invest in cash and ones that invest in stocks and shares.

Dale Scorer, senior financial Planner at EQ Investors, says ISAs can protect your savings and investments from tax, both income and capital gains tax.

He said: “Everyone can save up to £20,000 each year into an Isa; this can be cash or stocks and shares, or a mixture of both.

“And if you are saving on a regular basis, it usually makes sense to use your ISA allowance. If you don’t use the allowance each year you lose it. Using an ISA to hold stock market investments means there is no capital gains tax to pay when you sell your holdings and there is no tax to pay on any income you receive.”

How to choose an ISA

How you use your Isa allowance will depend on why you are saving, says Scorer.

“Your age, income, appetite for risk and attitudes towards impact on the planet and society should all be taken into consideration when you start looking for an ISA.”

Before deciding how much to save, make sure you have between three and six months worth of expenses – mortgage or rent, utility bills and basics like food and clothing – set aside in an easy access savings account.

Once you have that savings buffer, you can shop around for an Isa that best suits your long-term goals.

How much can I save into an ISA

You can save up to £20,000 into a ISA per tax year, and this allowance can be split between cash ISAs and investment ISAs. The tax year starts on 6 April and ends on 5 April each year, so you have until 5 April 2023 to use this year’s tax-free Isa allowance.

Isa – know how

• You can have several ISAs but HMRC rules mean you can only pay into one cash ISA per tax year.

• You will need to be over 16 and a resident in the UK.

• You can still open stocks and shares, innovative finance and/or lifetime ISA during the same tax year as you open a fixed rate cash or standard cash ISA, so long as you don’t save more than the overall allowance of £20,000 per year.

Cash-only Isa

A cash ISA works pretty much like a deposit savings account except you pay no income tax or capital gains tax – on the interest you earn.

If you are a UK taxpayer you can earn up to £1,000 of interest and not have to pay tax on it, depending on which income tax band you’re in. This is known as your personal savings allowance and is in addition to your Isa allowance.

Cash ISAs can be a useful alternative to a standard savings account, and some can be opened with as little as £1.

You can choose to make a regular monthly payment or put lump sums in the account as and when you can afford it.

The longer you can leave your cash Isa without making any withdrawals the more interest you may be able to earn, cash Isa providers can offer fixed interest deals which tend to pay more interest, if you only make a limited number of withdrawals.

Fixed-rate cash ISA

If you have a lump sum or are saving for a long-term goal these can be an alternative to an easy access cash ISA.

The interest rate, or AER, is fixed during the term, it’s not variable, so these accounts are a longer-term savings option and you will need to commit to saving for the full term of the savings account.

Bear in mind some cash Isa accounts do not allow additional deposits or transfers from other cash Isas, and many will not allow you to withdraw any money during the fixed term.

 You can also have cash versions of a lifetime Isa or LISA

Some types of Isa allow hou to use your savings to buy shares, these are known as either a stock and shares ISA or an investment ISA.

As with a cash Isa they work like a savings account, you can pay in a monthly amount or a lump sum, but instead of leaving your cash in a bank account – as you would with a cash ISA – the money is used to buy shares or funds which invest in a basket of shares.

Most shares also pay dividends if the companies the shares are in are doing well, which are then also used to help the money in your ISA account grow.

Think of the ISA as a wrapper rather than an account in itself, the wrapper is a tax free umbrella around the account which means that the money you invest is not considered liable for capital gains or income tax.

They do come with some risks, but there is more potential to get greater returns, on the money you put in.

To take out an investment ISA you will need to be over 18 and a UK resident.

There are several ways you can pay into an investment ISA. You can choose to do one through an investment platform or an online stockbroker. Or you can do it through a bank or building society.

An investment platform may offer you the option to buy shares and then put them in an Isa wrapper, or you can choose to buy shares from the platform in the form of a fund.

Most banks and building societies offer an investment Isa which will normally invest in shares listed on the FTSE-100.

If you’re thinking about investing in a stocks & shares ISA, you will need to bear in mind that this type of savings account does come with some risk, you will also have to pay fees and charges.

So while they are tax-free you will normally be charged an account fee by the platform, if you use an investment platform. The fee can be flat, or it can be charged as a percentage of the value of your investment.

Other types of investment Isa include:

The Help to Buy Isa:

This type of Isa closed to new accounts on 30 November 2019. If you’ve already opened a Help to Buy ISA you can keep saving into your account until November 2029, with a further 12 months to claim your government bonus towards your first home.

A Help to Buy ISA is a government scheme designed to help you save for a mortgage deposit to buy a home. To qualify you must be a first-time buyer and not own a property

If you missed out on opening a Help to Buy ISA, you can open a Lifetime ISA instead which has a similar bonus scheme for first-time home buyers.

Innovative finance Isa

These are peer to peer ISAs which means you are in effect lending your money to individual borrowers who then pays back that money with interest. These don’t invest in the stockmarket but are used instead by borrowers who may be looking for start-up capital for a business or enterprise. They can be high-risk, although some platforms that offer these types of Isas have contingency funds as these types of Isa are not protected by the Financial Services Compensation Scheme should they collapse.

Lifetime Isa or LISA

This is a type of ISA for those saving up for a home or their retirement or both. There are both cash or stocks and shares versions and you can save up to £4,000 a year and you get a 25 per cent bonus from the government. You can only open one up if you are between 18 to 40, although you can keep paying into the ISA and receive the bonus up to the age of 50. You only get the bonus if you use the saving to buy a house, or if you are saving for retirement take it out after you turn 60.

Junior stocks and shares Isa

JISAs are savings accounts for children under 18. You can get a cash JISA or a stocks and shares version. The Junior ISA allowance for the 2023-24 tax year is £9,000. Anyone can contribute to a JISA.

You can switch ISAs or even combine them so long as the amount invested does not go over your annual allowance, you will have to pay a fee though, as most providers you switch charge an admin fee for switching over funds.

If the company that provides your stocks and shares Isa goes bust then you are protected by the Financial Services Compensation Scheme (FSCS).

To qualify the Isa provider will need to be a firm regulated by the Financial Conduct Authority (FCA). The FCA insists all firms separate their money and assets from their client’s money and assets, so if there’s a shortfall then the FSCS can cover any amount lost up to £50,000. If you are mis-sold an investment by a company that goes bust you may also be eligible for compensation up to £50,000.

You can have two or more stocks and shares Isas so long as you do not invest more than annual limit, so if you open two accounts you can only pay in £10,000 into each.

What do stocks and shares ISAs invest in?

• Stocks and shares
  These are individual company stocks, and shares, experienced investors often research companies before investing in these types of assets.

• Exchange traded funds (ETFs)
  ETFs are collective investments and will invest in a basket of stocks and shares which reflect a particular index or market

• Bonds
  Bond funds invest in government or corporate bonds, this is a form of debt and the company or government pay interest to the bond holder.

• Unit trusts and investment trusts
  These are collective investments, or funds, that invest in a basket of shares or stocks, they are often themed – such as FTSE 100 – so that they track the performance of a sector, such as the UK’s largest companies.