ISAs were introduced on 6 April 1999 to replace two existing tax efficient schemes – Personal Equity Plans (PEPs) and tax exempt special savings accounts (TESSAs). The attractions of ISAs are that they are free of income and capital gains tax while you do not have to declare them on your tax return. Dividends from equities, however, have been partially taxed since 5 April 2004 at source at the rate of 10%. But higher rate taxpayers do not have to pay any extra tax on dividends.

You have a choice of putting your ISA savings into cash, equity, bond and property funds or individual shares and a few life insurance company investments. Up to £3,000 can be placed into a cash ISA each tax year (which runs from 6 April to 5 April the following year). A total of £7,000 can be invested into shares or funds within an ISA. Your ISA allocation can be split between the two, with a maximum of £3,000 going into the cash portion and a total of £7,000 overall. The fund and shares portion of ISAs can include unit trusts, investment trusts, OEICs, government bonds, corporate bonds and individual stocks.

The maximum investment of £7,000 a year is not a substantial sum of money but given that you can enjoy capital growth free of tax, it is advisable to take advantage of it. After 10 years, for example, with compound growth, you may have built up more than £100,000 in your ISA portfolio, which is not subject to income or capital gains tax.