The annual contribution limit for tax-free individual savings accounts (Isas) is being increased to £10,200 to help savers hit by low interest rates. The rise in the allowance, previously £7,200, takes effect from October 6 for over-50s and from next April for younger savers.
Savers will be able to put up to £5,100 a year into a cash Isa to earn tax-free interest, with the remaining allowance available for tax-sheltered stock market investment.
The Treasury said the increase will enable pensioners and those preparing for retirement to move more savings into tax-advantaged Isas, so improving their returns. Extending the increase to everyone from April would encourage saving as the economy emerged from the downturn, it added.
Experts welcomed the boost to the allowance, but said it was disappointing that younger savers would only be able to take advantage from next tax year.
James Davies, investment research manager at Chartwell Group, an adviser firm, said: “The demographic that has neglected saving over the last decade has to wait another year. This is a missed opportunity for the government to immediately engage with those who want to invest for their futures.”
With interest rates at record lows, the benefit for individuals will also be limited in the short term. The increase will allow savers to earn tax-free interest on up to another £1,500, on top of the current cash Isa limit of £3,600. But on a typical Isa rate of 2 per cent that equates to just an extra £30 a year of interest. Even for a higher rate taxpayer, the tax savings would be worth just a few pounds, said Paula Higgleton, tax partner at Deloitte, the accountants.
“The chancellor has been rather clever here,” said Tony Bernstein, senior tax partner at accountants HW Fisher. “Since investment returns are very poor at the moment, it is a very cheap way of giving tax relief and, importantly, a good headline generator.”
The Treasury said that bringing in the increase from October for over-50s would give time for Isa providers to adjust their systems. Savers who have taken out Isas for 2009/10 will be able to top up their accounts with the same bank or building society.
However, there would be no obligation for providers to pay the same rate on top ups. Savers who have locked in to fixed rates might find they are not offered the same return on the extra £1,500, suggested experts.
