Of course, Isas don't just offer savings on income tax. They also shelter profits from capital gains tax ? which for those who can afford to utilise their Isa allowance each year can be a significant tax saving over the long term.
So how do investors minimise the cost of investing in order to maximise the tax savings? One option is to invest in funds with lower charges. One of the easiest ways to do this is to invest in a passively managed fund, such as a tracker, which tends to have far lower fees.
Vanguard, which conducted this research, is one of the biggest providers worldwide of these passively managed funds. Most tracker funds do not have upfront costs, whereas on an actively managed fund these are typically 4.5pc.
And ongoing management charges are lower: a typical actively managed fund, where a fund manager selects which companies to invest in, will charge between 1pc and 1.5pc a year. In contrast, the cheapest tracker funds charge just 0.3pc a year. This would cut the annual costs of investment on a �10,000 equity growth Isa from �150 a year to about �20.
Tom Rampulla, the managing director of Vanguard UK, said: "By choosing low-cost funds, Isa investors can keep more of their tax relief. These savings can add up over time and make a significant different to your overall return."
The research also showed that only 9pc of investors looked at the cost of the fund. In contrast, almost twice as many investors looked at the past performance, with a further 13pc saying they looked for "big name" funds.
But this process of selection can be risky: identifying the funds that will consistently outperform the market is difficult. Recent research showed that after an initial five-year period, only 22pc of the top-ranked funds remained in this top band in the next five-year period.
On the other hand, a passively managed fund will never outperform its chosen index (it will give the same performance, minus costs). And fund managers who strongly outperform the market can deliver spectacular returns.
Darius McDermott, the managing director of Chelsea Financial Services, said: "It isn't just tracker funds that offer lower charges. Those that buy Isas through a discount broker should find that some or all of the upfront costs, and often some of the ongoing management fees, are also rebated."
He said that for many investors it is not a case of either-or when selecting passive or active funds: "Many people will have both within their portfolio.''
There are also options such as exchange-traded funds which are low-cost too.
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