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By Danny Cox, Hargreaves Lansdown

As the end of the tax year approaches, it's important to make sure you're making the best use of the tax allowances available to you. One of the most popular tax breaks comes in the form of ISAs. Danny Cox, Head of Advice at Hargreaves Lansdown, answers investors' most commonly asked questions on ISAs.

What is an ISA?

An ISA, or Individual Savings Account to give it its full name, is a very tax efficient way to invest. An ISA is a "tax wrapper" which shelters the underlying investments from taxation. There are two types of ISAs, a Stocks and Shares ISA and a Cash ISA.

Is an ISA different from a PEP?

PEPs (personal equity plans) were the forerunner to ISAs. Since April 2008, PEPs have been merged with Stocks and Shares ISAs and are under exactly the same rules.

What do you mean by tax efficient?

Money invested in an ISA is completely free of capital gains tax. In a Stocks and Shares ISA there is only one type of investment where the income is paid gross - corporate and government bonds. On everything else, including cash, the income is paid net.

Interest on cash held in a Cash ISA is also tax free.

This means that money paid into an ISA is likely to grow faster than money invested into taxable savings and investments.

How much tax will I save?

Any gains you make in an ISA are free from capital gains tax (18% on gains over the annual capital gains tax allowance £9,600 for the 2008/09 tax year).

Other tax benefits:

• Stocks and Shares ISA: If you are a basic rate tax payer you would save 20% income tax on interest from fixed interest holdings, whilst a higher rate tax payer would save 40%. Dividends are paid net of 10% tax which is non-reclaimable. As there is no further tax to pay, a higher rate tax payer would save 22.5% additional tax. Interest on cash is paid net of a 20% tax charge. As there is no further tax liability higher rate tax payers save 20%.
• Cash ISA: Basic rate and higher rate tax payers would save 20% and 40% tax respectively. I am a non tax payer so I don't need an ISA - or do I?

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ISAs are a great idea for both basic rate tax payers and higher rate tax payers. The tax benefits are too good to lose.

It is true that non tax payers are less likely to benefit from ISA, however, there are still good reasons for you to consider one:

Your tax position may change. If a non tax payer becomes a tax payer in the future, savings that are not in an ISA would immediately be taxed. If these savings had been sheltered in an ISA then they would remain tax free.

Non tax payers pay capital gains tax at the same rate as higher rate tax payers, 18%. Sheltering your investments in an ISA will help you to avoid paying any capital gains tax above the current annual allowance of £9,600.

How much and where can I invest?

You can invest up to £7,200 a year into a Stocks and Shares ISA , or up to £3,600 in a Cash ISA with the balance (within the overall limit) in a Stocks and Shares ISA. Please remember tax allowances can change.

The stock market component can be invested in shares, unit trusts, investment trusts, Gilts or Corporate Bonds. Some accounts, including the Vantage Stocks and Shares ISA , also allow you to hold cash whilst you decide where to invest.

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You have to be 18 to invest in a Stocks and Shares ISA and 16 to invest in a Cash ISA.

I like the idea of a Stocks and Shares ISA. How do I choose where to invest?

This will depend upon how long you will be investing for and how much risk you want to take. If you don't want to risk your capital, you can open a Cash ISA (and the interest is tax free).

For those who have the appetite for stock market or corporate bond investments and are happy with the risks involved, Mark Dampier's Wealth 150 is a great starting point. The Wealth 150 represents our favourite funds across all the major sectors, so wherever you choose to invest you should find something of interest.

For a fund to be included in the Wealth 150 it must go through a rigorous selection process. Our 10 strong research team use complex mathematical models and meet hundreds of fund managers a year. The Wealth 150 list is regularly monitored to ensure that it continues to represent our favourite funds.

Alternatively you could choose one of our HL Multi Manager funds. A multi-manager fund is a managed portfolio of funds offering investors a ready made and broadly diversified portfolio with one easy investment.

For first time investors in need of a simple way to invest in the stock market or for more experienced investors looking for a broadly based fund around which to group specialised holdings, each HL Multi-Manager fund provides a professionally monitored portfolio of what we believe are some the best fund managers in their field.

I already have a couple of other ISAs, I don't really want another?

Diversification is one of the most important aspects of investing and building a portfolio. Many investors start their portfolios by investing small amounts, perhaps even regular savings often buying the ISA direct from an investment house. The problem here is that if you want to diversify your risk, you normally had to buy a new ISA direct with a different investment house. This meant that for every holding you had to deal with a different company and you can imagine the paperwork.

Probably the best way to invest in an ISA is to use a fund supermarket such as HL Vantage.

With Vantage, your investments are held in one place, with one set of paperwork and we deal with the investment houses for you. This means that you can have almost as many holdings as you like, yet just deal though one broker.

And of course because we do this for hundreds of thousands of investors, buying in bulk on their behalf, we can negotiate discounts on your ISAs and pass those benefits on to you.

The Vantage ISA provides you with all the investment choice and diversity that you need in one place with one plan.

You can also transfer your existing ISAs into your HL Vantage ISA making the overall management of your portfolio much easier. More about transferring your ISA.

Are there any other benefits?

You don't have to record gains or income from your ISA on your tax return. This means that they have no negative impact on your tax position.

This is particularly important for the over 65s who can sometimes risk losing their age related personal allowances if their income is over £21,800 a year.

Age related allowances are the extra amounts of income that you can receive before you start to pay tax once you have reached age 65.

With stock markets and interest rates where they are, is it worth bothering?

If you do not use your ISA allowance you will lose it. When stock markets recover, the growth will be tax free, saving up to 18% on any profits. You are also benefiting from paying no further tax on the interest on cash and in the case of fixed interest and corporate bond funds, the interest is tax free.

If you are worried about the stock market, you could always spread your ISA subscription over 12 months via direct debit. This means that you benefit from any falls in the market as you will be buying more units at lower prices, so if the market eventually regains the lost ground they will count for much more. If the market rises you profit from the increasing value of investments already made.

Alternatively you can invest up to £7,200 into a Stocks and Shares ISA and hold it as cash pending investment later. This is not the same as a Cash ISA, as the interest is not tax free. However, it means that you are taking advantage of your allowances without committing to the markets - yet.

For those who would invest in a Cash ISA, interest rates on cash may be at historic lows now, but this won't last for ever. Your ISA holdings will continue to benefit from tax free interest continuing to make a big difference to your returns. When rates rise again these savings will become greater.

Danny Cox is Head of Advice at Hargreaves Lansdown

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