Open an ISA or you could lose £2,750!

The new tax year is the perfect time to get our finances in order. We show you how having an ISA could make you an extra £3k...

This article was first sent to readers as a '360 degrees' email

At lovemoney.com, we reckon an ISA is one of the best places to put your money, as it shelters your savings from the taxman.

However, according to Principality Building Society, two-thirds of people don't even have one.

Every year, all UK taxpayers get a chance to shield up to £3,600 of cash from the taxman, and banks and building societies will try to do all they can to entice you to open one, 'before it's too late'.

But it's all very well having those boffins and bankers telling you why you should have one, but how much does an ISA wrapper actually benefit your savings?

Why tax-free makes a difference

Currently, the government takes 20% of your savings income if you're a basic rate taxpayer, and 40% if you're a higher rate taxpayer.

So, for every £100 you earn in interest, Mr. Taxman takes £20 and £40 respectively - that's up to two fifths of your hard earned interest lining the Treasury's pockets, before you've even batted an eyelid.

With interest rates at record lows, your savings probably won't be working as hard as before, and you may think there's little point in dabbling in an ISA.

But it also means if you don't make use of your tax-free allowance, you could be putting further dents into already poor returns.

And, as we celebrate ten years since the launch of the ISA, there are many ways you can protect your cash from the tax man

Here are some scenarios:

Let's say you stashed away a tidy sum of £300 a month in an ISA paying 3%. Assuming the rate stays the same, in five years time you'd have £19,423.47 (inc. £1,423.47 in interest) by having your money in an ISA.

This compares to £19,130.49 as a basic rate tax payer in a regular account, and £18,841.70 as a higher rate taxpayer. That's £292.98 and £581.77 less in interest respectively.

The benefits of an ISA increase as the returns do. For example, First Direct's Regular Saver ISA pays a market leading 7%. So, £300 a month would earn you £3,487.64 in interest over five years, compared to £2,022.22 for a higher rate taxpayer earning the same rate. That's nearly £1,500 less in interest.

It's a similar story if you save a lump sum each year.

Here's the difference an ISA wrapper would make if you saved £3,600 once a year as a lump sum payment:

On first glance, the benefits of the ISA wrapper won't seem that enticing. After all, £25 extra over a year will hardly get you cracking open the champagne bottles.

The key factor here is time. The longer you save and the more you put into the account, the more you'll benefit from compound interest.

And, after 10 years of saving, the difference grows to nearly £2,750, simply by using an ISA wrapper.

Save now, not later!

Remember, you don't need to wait until the end of the year to put money into an ISA, and as of Monday, you can shelter a new £3,600 from the taxman.

It's best to do this as soon as you can. That way, not only will your money be working harder from the start of the tax year, but you won't be caught up in the last minute rush to open an account next March.

Once your ISA allowance has filled up, there are other tax efficient avenues you can explore. National Savings and Investments has products such as Premium bonds and Index Linked Savings Certificates which provide tax-free returns.

But with RPI inflation currently at 0% and luck on Premium Bonds anything but guaranteed, an ISA - for now at least, is the best place to get a solid return on your cash, tax free.

More: How to pick the right cash ISA for you