Helpdesk: Saving needn't be taxing

IA M earning virtually nothing on my savings, but have just realised that not only that, I am being taxed on that nothing. I admit I have always been lazy about things like Isas, but think the time has come to open one. Can you tell me how to go about it, where I can put the cash, and the best kind of account to go for?

PA, Edinburgh

Michelle Slade, savings expert at Moneyfacts, writes:

The tax-free status of ISAs is a real bonus for savers, particularly in the current environment when rates are so low. A basic rate taxpayer earning 3 per cent interest in a cash ISA, would need to find a standard savings account paying 3.75 per cent in order to achieve the same level of income.

In order to open a cash ISA you need to have the usual forms of identification as well as your National Insurance number.

There are two types of cash ISAs. Variable rate ISAs allow you to access the money should you need too, but the rates offered are lower. Fixed rate ISAs offer higher returns, particularly if you invest for longer periods, but most do not allow you to access the funds during the terms of the deal.

The highest rates on variable ISAs are currently being offered by Santander, which pays 2.85 per cent on its Flexible ISA, or Bank of Scotland, which is paying 2.80 per cent on its Cash ISA Direct Reward Account. If you are already an existing current account customer of either provider you will be offered a rate of 3 per cent on each of these products.

Alternatively, Northern Rock has a one-year fixed rate ISA paying 3 per cent or a three-year ISA paying 3.50 per cent. If you are prepared to lock your money away for five years, Birmingham Midshires is paying 4.25 per cent.