Darling urged to help savers by raising Isa limits

Alistair Darling is being urged to increase the limit on individual savings accounts (Isas) to £10,000 a year in the Budget on Wednesday to help savers hit by low interest rates.

Experts are hopeful of a substantial rise in the tax-free allowance, currently £7,200 a year, following recent comments by the chancellor and Gordon Brown that they have been looking at ways to make Isas more attractive.

A £10,000 annual limit might allow savers to put £5,000 into a cash Isa to earn tax-free interest, with the rest of the allowance available for equity investments.

However, with government finances stretched, there are also fears that any Budget increase in Isa allowances will only benefit pensioners or not take effect until next year.

“The chancellor will do whatever he can at the cheapest price,” said Ben Yearsley, investment manager at Hargreaves Lans down, the financial adviser. “Raising the Isa allowance doesn’t actually cost very much in the short term because interest rates are so low.”

Nationwide Building Society said the annual £7,200 allowance should be increased to more than £8,700 to regain its value against inflation since Isas were launched a decade ago. An increase to £9,000 would match the annual limit for old-style Peps, which Isas replaced, added Adrian Lowcock at Bestinvest, an adviser.

Yearsley said that if the allowance was boosted for this tax year, savers who have already subscribed to 2009/10 Isas should be able to top up their accounts. However, any increase could be delayed until next April. An increase might also be introduced over a number of years or given for only one year’s contributions.

Some investment companies are calling on the chancellor to allow Isa investors to reclaim the 10 per cent tax credit on share dividends. But this could prove costly for the government by giving an instant tax benefit for previous years’ Isas as well. By contrast, the additional tax savings from increasing the annual allowance would take time to accumulate.

The chancellor is reported to have ruled out scrapping basic rate tax on standard savings accounts, even though this might cost only a few hundred million pounds a year in tax revenue. Another option could be to raise personal allowances for pensioners to increase the income they can receive before paying tax.

A Budget boost for savers would be welcome given that many accounts are now paying under 1 per cent interest following the base rate reduction to a record low of 0.5 per cent.