The best cash ISAs for new starters

If you're new to ISAs, we show you how to make the most of the most of tax-free saving.

If you have savings you don't need to touch for a year, it probably makes financial sense for you to take out a cash ISA. Using this savings 'wrapper', you can stash away up to £3,600 - tax-free - this tax year.

Tax years run from 6 April in one year until 5 April the next, so we're already a month and a half in. If you haven't already used up your cash ISA allowance, it's time to get your skates on.

But what if you don't have a spare £3,600 knocking about?

Starting small

I think there are some misunderstandings where ISA allowances are concerned. For example, last week a friend told me that she hasn't taken out a cash ISA because she doesn't have the full £3,600 to put into it.

In fact, you can start many cash ISAs with a far smaller amount than that. Some even allow you to kick off with a £1. You can then make additional contributions as and when throughout the year, just as you would with an ordinary savings account.

Top picks

So - what are the best cash ISA options for people starting small?

Here are my top picks for people investing just £500:

How to choose the right ISA for you

To work out which of the three is right for you, you need to take several different factors into account.

Transfers in: First, it's worth noting that none of these ISAs accept transfers in from existing ISA balances; it's 'new' money only, I'm afraid. Of course, if you're a first-time ISA saver you won't need to worry about that right now.

Interest rate: This is probably going to influence your decision more than anything else. Barclays' Golden ISA is well ahead of the pack in this respect, offering a very healthy 3.61% AER.

Just remember though, this does include a 1% bonus rate for the first 12 months which will then disappear.

Additional deposits: Both the Golden ISA and the Guaranteed Cash ISA 2009/10 from National Counties Building Society let you make additional deposits (up to the £3,600 limit) over the course of the year.

This makes them good options for savers who want to start small and add to their ISA fund as they go along.

This isn't the case with the Internet 1 Year Fixed Rate ISA from Birmingham Midshires. With this ISA, you're only allowed to make additional deposits for as long as the current rate is offered.

If and when the offer is withdrawn - which could happen at any time - you won't be allowed to put any more money into the account.

Variable or fixed: The big advantage with Birmingham Midshires' ISA is that its rate is fixed, while the other two are variable.

So - while the withdrawal conditions attached to the variable rate ISAs are more flexible, you also face the risk of a substantial rate drop.

For example, the only rate guarantee that National Counties' ISA gives is that it will stay at least 1% above the Bank of England Bank Rate until 5 April 2010. But, with the base rate currently set at just 0.5%, that doesn't say much.

If you're looking for total peace of mind with regard to rates, Birmingham Midshires' ISA may be the best choice for you.

Keep your eyes open: In April 2010, you'll probably need to find a new home for your ISA cash - whichever one of the three you choose.

By then the ISA from Barclays will have lost its bonus rate, National Counties' meagre rate guarantee will no longer apply, and the ISA from Birmingham Midshires will have come to the end of its term.

In the meantime, make the most of your tax-free savings potential as soon as you possibly can!

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