Every financial year investors have an important decision to make. They must make up their minds whether they will take advantage of the tax breaks available within individual savings accounts (Isas).

Isas allow you to save up to £7,200 each year in stocks and shares, bonds, commercial property or simple deposit accounts.

The Government may have chipped away at some of the tax concessions over the years, but financial experts reckon that it is still worth taking advantage of your annual Isa allowance.

UK investors appear to agree with them - there are 17 million people with £207 billion invested in Isas.

The rules

Since April 6 2007 the distinction between maxi and mini-Isas has been removed and replaced by stocks and shares Isas and cash Isas. The maximum annual investment limit has been lifted to £7,200. It will rise again to £10,200 from April 6 2010. For those aged 50 or over the raised limit will apply from October 6 this year.

You can put the entire allowance into stocks and shares, or you could divide it between a stocks and shares Isa and a cash Isa, though the maximum that you can put in a cash Isa is £3,600 (£5,100 when the raised limit applies)

The tax breaks

Interest on cash Isas is paid without deduction of tax, while investors in bonds can claim back the 20 per cent tax on their interest payments.

Share investors can no longer claim back the 10 per cent tax credit on dividends, so non-taxpayers and basic-rate taxpayers are no better off, from the dividend point of view, than they would be outside an Isa.

However higher-rate taxpayers still benefit from being inside an Isa because they have no additional tax to pay, as they would outside an Isa.

All capital gains are tax-free.

Cash Isas

Every Isa has to be run by an Isa manager, normally a bank or building society. The account will operate very much like a normal deposit account, except that the interest you receive is tax-free.

In most cases, cash Isas offer savers instant access to their money, though some managers now have notice periods, which can vary from seven days to 180 days, with interest penalties for ealy withdrawal.

In theory, savers should be able to transfer from one Isa provider to another, but some managers impose penalties for doing so. These range from a flat fee of £30 to 180 days' loss of interest.

It is worth shopping around for the best deal. Rachel Thrussell, of Moneyfacts, the financial website, says: "Interest rates and terms and conditions vary greatly, so you need to check before you invest."

If you do transfer your Isa, do not withdraw your money from your existing account or you could lose your Isa benefits. Instead, contact your designated new provider and allow it to arrange the transfer.

Stocks and shares Isas

Investors again have to choose an Isa manager, normally a stockbroker, bank or fund group. At the simplest level an investor could buy a single fund from a fund manager, which would also provide the Isa wrapper.

Alternatively, he or she could go to a financial adviser, who would help to select a plan manager and also some suitable funds.

Those wishing to buy shares would normally go through a bank or stockbroker.

Some experienced investors may want to opt for a self-select Isa. They still require a plan manager, but they are able to make their own investment decisions.They may choose to use a cheap execution-only broker as a plan manager, while those buying funds could use a funds supermarket or discount broker to gain access to a wide range of funds at a reduced charge.

Charges

These vary considerably, depending on the type of Isa. Cash Isas normally carry no extra charges and investors holding a fund where the fund manager is also the plan manager may also escape extra costs over and above the normal fund charges.

On a self-select Isa, however, there would normally be an initial setting-up charge and an annual administration charge. There would also be the transaction costs of buying and selling shares and the normal charges levied on unit and investment trusts.

Five news stories

Over-50s may be prevented from topping up Isas

Isas get 93 per cent lift in month

Don't fall into bank Isa trap

FSA urged to act on risky accounts

Nationwide halts Isa transfers

Five features

Save your family £200,000 in tax over your lifetime

Tax-free savings explained

A boost for shareholder democracy

How to buy an Isa

Your at-a-glance sector selector

Five websites

Tax Incentivised Savings Association

HM Revenue & Customs

Moneysupermarket.com

Financial Services Authority

The Motley Fool