If someone offered you a delicious cupcake, would you take a bite and throw the rest in the bin? If you can’t resist a sweet treat the thought of throwing away a delicious cupcake probably fills you full of horror, but that’s essentially what millions of savers could be doing by not making the most of the full annual Individual Savings Account (ISA) allowance.

Savers with an ISA in 2022/23 had an annual allowance of £20,000, yet according to InvestEngine only 35% of them took advantage of their full allowance¹. That means nearly two-thirds of savers ‘threw their cupcake in the bin’ and wasted an opportunity to enjoy more from their money.

In comparison to other savings accounts, ISAs can help you save tax-free and can help protect your money from the worst effects of inflation.

There are four types of ISAs. These are cash ISAs, lifetime ISAs, stocks & shares ISAs, and innovative finance ISAs.

The allowance in the 2023/24 tax-year will be £20,000 again and you can pay into a combination of ISAs that make up the full allowance, giving you flexibility to save in a way that best suits you.

Whilst you can pay into a combination of ISAs during the tax year, it’s important to note that you can’t pay into more than one of the same type of ISA in a tax year. Meaning for example, you can only pay into 1 cash ISA per tax year.

However, some providers may allow you to have multiple ISA products with them under the same ISA umbrella. As an example if you have £20,000 to save, you could open a Fixed Rate Cash ISA with us and deposit £10,000 and also an Easy Access Cash ISA with £10,000. This flexibility that some ISA providers offer, allows you to save in the products that best suit your financial needs. It really just depends on what best suits you.

A stocks and shares ISA lets you hold a variety of assets such as cash, shares, investment funds, investment trusts, gilts and bonds. While this type of ISA may allow your investment to go up in value, providing you with more growth, it’s worth noting that they can also be riskier as your investments can also fall in value so you could get back less than you invest.

Innovative finance ISAs also earn tax-free interest and work by loaning borrowers’ savings to individuals or businesses through peer-to-peer lending platforms. You can earn higher rates of interest than a regular savings account this way, but there are limited protections for you if the borrower defaults – basically, there is a risk that you may not get your money back.

A lifetime ISA can be used to help you buy your first home, or to save for your retirement. To open one you must be age 18 or over but under 40, and you can hold cash, stocks and shares or a combination of both. All payments made into a lifetime ISA in each tax year, up to the maximum of £4,000, receive a 25% government bonus. So, every time you save £4 you’ll get an extra £1 from the government (maximum of £1,000 per tax year).

The £4,000 lifetime ISA limit counts towards your overall ISA allowance. If you used the full £4,000 then you would have £16,000 of your ISA allowance left for your other ISA accounts this year to make up your total £20,000 allowance.

If you do decide to save in one or more types of ISA, you should know that the government sets the allowance limit and this can vary from year to year. Don’t forget to check what your annual allowance is each year in case it changes, to ensure you maximise your potential savings.

It’s also worth knowing that your ISA allowance can’t be rolled over to the next financial year either, so you might want to make use of your full allowance each tax year.

By keeping the cash you’ve saved at home or in the same current account you’ve always had, you could be missing out on making the most of your money. If you don’t have an ISA, your earnings could be shared with the tax man or only earning a low amount of interest.

As a savvy saver who may already have an ISA or someone who’s now considering opening one, remember to ‘eat all of your cupcake’ and take full advantage of your annual ISA allowance.

The value of your investment can go down as well as up, so you could get back less than you invested.

¹ Millions are failing to use full ISA allowance - Your Money