Rates might be low, but take advantage of your Isa allowance if you possibly can, says personal finance editor ADAM AIKEN.

Nearly two thirds of all taxpayers are failing to take advantage of their tax-free savings allowances, either because they haven’t got enough cash or because they haven’t taken steps to shelter their savings from the taxman.

Stats published during the economic downturn have shown increasing numbers of savers dipping into their reserves to fund their daily living expenses, but analysts believe that a large proportion of the UK’s 30.2 million taxpayers are simply not putting their money in the most sensible place.

According to figures from HM Revenue & Customs, 11.9 million people opened a cash individual savings account (Isa) last year. The average balance in each of those accounts was �2,371 - significantly less than the personal limits in force last year of �3,600 or �5,100, depending on your age.

As with pretty much all savings accounts, the typical interest rate in an Isa is unimpressive at the moment, but it’s still a good idea for savers to put their money into these tax-free products if possible. You can’t carry forward your annual limit to future years, so you won’t be able to make up any shortfall once the new tax year starts. On the other hand, if you have put money aside in an Isa, you’ll be well placed to benefit when the Bank of England finally starts putting up interest rates.

The other thing to bear in mind is that it’s fairly easy to move your Isa funds between accounts, as long as you haven’t committed to staying with your provider in return for a fixed rate of interest.

“There is evidence that people have been sacrificing their savings in order to pay down debts and supplement dwindling incomes,” said Simon Healey, head of savings at Aldermore, a new British bank.

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“Prudence is to be applauded, but savers should be aware that once they have cashed in their Isas, their annual tax-free allowances can never be reclaimed.”

In other words, once you have paid in �5,100 (which is now the annual limit for all cash Isa savers), you can’t pay in any more during the same tax year, even if you have subsequently made a withdrawal. That’s because the limit applies to total contributions during any given year, not the overall balance in the account.

Mr Healy said he thought savers had been put off because of low interest rates, but he warned it was a false economy to avoid using your Isa allowance if you do have some spare cash.

“Isa allowances claimed in this and previous years will continue to generate tax-free returns in the future,” he said.

“Although interest rates are low today, they are set to rise. The larger a savers’ cash Isa fund, the more tax-free benefit they will generate.”

With nearly �180bn currently sitting in cash Isas, he added: “Many investors could significantly improve their returns simply by moving their cash Isas to another provider, and savers should look at what’s on offer in order to maximise their short-term returns.”

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