Don’t neglect your Isa allowance

In the current equity market turmoil, most investors are probably worrying more about minimising losses from tumbling share prices than shielding profits from tax. But make sure you use up this year's Isa allowance by 5 April, if you haven't already done so. Volatility will be with us for a while yet, but long-term investors should still take advantage of one of the very few ways to avoid tax courtesy of the Government.

Isas are changing slightly from 6 April, but until then you can put up to £7,000 either all in shares via a "maxi" Isa, or split with up to £3,000 in cash and £4,000 in shares via either a maxi or "mini". With a mini Isa you can pick two different providers; with the maxi you are stuck with the one. Once your cash and/or shares are safely tucked away, subsequent returns whether interest on cash, or dividends (bar the first 10%) and capital gains on shares are earned tax-free.

Things get a little simpler from 6 April. The maxi and mini labels go and the total investment limit rises, for the first time in years, to £7,200. Cash can be up to £3,600 of this, leaving up to another £3,600 available for stocks and shares. Another small bonus under the new rules is that you can move funds held within a cash Isa into stocks and shares, although unfortunately this won't work the other way around.

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In the current climate, it makes sense to keep a "rainy day" cash reserve and what better place than a cash Isa offering tax-free interest. Providers change their rates rapidly these days, so shop around. You can view the latest best buys on Moneyfacts.co.uk. Birmingham Midshires now offers a competitive 6.35% on their latest no-notice account, but do remember not to put more than £35,000 with one provider, the amount guaranteed by the Financial Services Compensation Scheme.

As for shares, consider a "self-select Isa", where you get the freedom to make your own investment decisions. Dealing charges vary considerably, so check our recent Isa supplement for the best buys. For those not sure about equity investing yet, given current volatility, Hargreaves Lansdowne offers a good deal. Having used your Isa cash component, you can put a minimum £3,000 more cash into their shares Isa and earn 6% between 7 April and 6 July 2008 the maximum three-month holding period allowed under current rules before the money is invested in stocks and shares. That way you don't loose this year's shares allowance, and you win some breathing space.