Isa limit rise is a boost for savers

Isa limit rise is a boost for savers

Sam Dunn guardian.co.uk, Wednesday 22 April 2009 14.19 BST

• Budget speech reveals increase in Isa limit to £10,200
• Over 50s will benefit from the change this tax year

Isa savers got some good news in the budget.

Savers will be able to put up to £10,200 into Isas, with those aged over 50 allowed to make the extra payments in this tax year, the chancellor announced in his budget speech today.

The Isa allowance is currently £7,200 and allows savers and investors over the age of 18 to invest that amount in shares and stockmarket funds, including up to £3,600 in cash.

The changes will mean up to £5,100 in cash can be invested. However, only the over-50s will benefit this tax year – they will be allowed to make use of the extra allowance from 6 October while for younger savers the new allowances kick in next April.

The Treasury said the move would benefit around 5 million savers who currently use their full Isa allowance. Around 18 million people hold the accounts, which allow savers to hold either cash or funds without paying tax on interest or capital gains.

This is only the second time limits have been raised since Labour launched Isas in 1999, and comes amid growing calls for the government to step in and help savers hit by recent interest rate cuts, which have seen interest on savings accounts reach record lows.

Although savings specialists had been calling for an increase in allowances, they were unimpressed with the chancellor's response. "An extra £1,500 allowance from 6 October on a cash Isa paying 3% will give extra income of £22.50 over the rest of the tax year, meaning a tax saving of just £9 for a 40% tax-payer," said Carolyn Steppler, associate partner in personal tax at KPMG in the UK.

Gary Shaughnessy of fund management group Fidelity International said: "Increasing the Isa limit for future years fails to meet the needs of hard-pressed savers today.

"Fidelity, with strong support from Independent Financial Advisers, urged the chancellor to reinstate the dividend tax credit within Isas as a way to immediately boost Isa income, especially for basic rate tax payers. Increasing the maximum limit to £10,200 is jam tomorrow for the minority of people who invest the full annual allowance."

Despite the new allowance levels, there's a wider savings malaise warns Richard Norman, head of savings at the Post Office. "There is [still] low awareness of the current Isa limits; 56% of people have admitted they do not know what the existing cash Isa limit is.

"Furthermore, one in four of existing cash Isa account holders admit they do not already utilise their existing allowance."

The cash Isa's appeal as a safe harbour for savings has seen its popularity soar since the onset of the credit crunch. In December the 17% annual rise in cash Isa savings to £163bn was the biggest since 2003-04.

Extra savings will also be given to families with disabled children – the government says it will put an extra £100 a year into their child trust fund, while the severely disabled will receive £200 a year