Many people are taking advantage of mini-ISAs to make tax-free savings, but are disqualifying themselves from the greater benefits of maxi-accounts.
Cash ISAs have proved a big hit, with the Halifax alone selling more than 800,000 of these tax-free savings accounts since their launch in April 1999. It is easy to see why they have proved so popular. Unlike the Tessas they replaced, cash ISAs do not make savers lock away their money for five years to qualify for the tax breaks on offer. The Government's CAT marks make it easy to find a cash ISA with no charges, which accepts deposits as low as pounds 10, and which is guaranteed to keep its interest payments close to base rate.

For many savers, a CAT-marked cash ISA is a safe bet. You might expect the CAT mark to come only at the price of a lower interest rate, but the effect is marginal at best. Even among the highest-paying ISAs shown below, insisting on a CAT mark would shave only 0.3 per cent off the interest rate you get.

James Dalby of Leeds independent financial advisers Bates Investment Services says: "Cash ISAs tend to offer the best interest rates that are available on the market. Look for the most competitive CAT-marked ISA, and you can't go wrong."

But for other investors, who want to maximise their tax-free stockmarket investment later in the financial year, cash ISAs conceal a nasty trap. ISAs come in two varieties: mini-ISAs, which put all your money into just one of the ISA's three investment options, and maxi-ISAs, which are allowed to spread your money across more than one of the three options - shares and cash, say.

Putting even the tiniest sum into a cash mini-ISA means you have disqualified yourself from buying a maxi-ISA for the whole of that tax year. Locking yourself into the mini route cuts the maximum amount of money you can then put into a 1999/2000 stocks and shares ISA from pounds 7,000 to just pounds 3,000.

This is because of the Inland Revenue's determination to ensure no-one breaches the ISA's overall investment ceiling of pounds 7,000 (falling to pounds 5,000 from 2000/01 onwards). As soon as you open a cash mini-ISA, the Inland Revenue assumes you have used your full cash allowance of pounds 3,000 (pounds 1,000 from 2000/01), and your full insurance ISA allowance of pounds 1,000. That leaves just pounds 3,000 as the most you can put into a shares ISA.

Anyone anxious to make the most of their stockmarket ISA entitlement should put their whole allowance for the year into a shares maxi-ISA. This route lets you put a full pounds 7,000 into shares in 1999/2000, and pounds 5,000 a year after that.

We will not know how many people have fallen foul of the mini-ISA trap until March next year, when share investors start rushing to use up their 1999/2000 ISA allowance before it disappears. Justin Modray of independent ISA experts Chase de Vere says: "It's going to have quite a serious impact on a lot of investors, but it is hard to gauge how many people it is going to affect until we get to the end of the tax year.

"The biggest problem will be people who quite honestly don't realise what is going on and inadvertently go into a mini and a maxi ISA in the same tax year. The systems are such that it wouldn't get picked up immediately. I think the Government has to carry the can to some extent for not making people more aware of the ins and outs of ISAs."

If you do open a cash mini-ISA and decide later it was a mistake, prompt action could still save the day. The Revenue rules allow you to cancel an ISA providing you do so within 30 days of opening it, and ensure the company running the plan does all the necessary paperwork. A Revenue spokeswoman says: "Under those circumstances, you would then be able to go on and subscribe to a different ISA."

All but a tiny handful of cash mini-ISAs work on a variable interest rate. One of the few providers with a fixed-rate plan is SAGA, which sells only to the over-50s.

Jay Fry of SAGA Investment Direct says: "It is prudent to have a mixture of fixed-rate and variable-rate investments in your portfolio. For our customers, it reduces the risk of a fall in income. To have both products available - fixed and variable - is an advantage to them."

The ISA rules allow you to put a maximum of pounds 3,000 into a cash ISA this year. The average deposit in a Halifax cash ISA so far, at between pounds 2,500 and pounds 2,750, is already nudging close to that ceiling. Savers can also put up to pounds 9,000 of ex-Tessa capital into a replacement cash ISA without eating into their ISA allowance for the year.

In the three months from April to June this year - the only quarter for which Revenue figures are available - cash mini-ISAs took by far the biggest single share of any ISA option. Cash mini-ISAs accounted for pounds 3.71bn of ISAs' pounds 7.17bn total sales.