ISA changes mean good news for savers
Question: I am confused as to what I can do with my ISA allowance this year. Can you please clarify the situation as I know there were changes announced in the Budget?
Answer: In among the doom and gloom of the recent Budget, which included a series of tax rises, a cap on pension contributions, there was some good news for those savers that have been paying the price for the credit crisis in the form of low interest rates from monies held on deposit.
The Chancellor announced that from the next tax year, ie April 5 2010, an investor will be able to put up to £10,200 a year into tax-free individual savings accounts (ISAs). For those aged over 50, they will be eligible for this increased allowance from October 6 2009.
ISAs, which replaced Personal Equity Plans (PEPs), celebrate their tenth anniversary this year. Since they were launched the limit that an investor is allowed to contribute has only increased once. Up until now the maximum that could be contributed was limited to £7,200, half of which could be invested in a cash savings account.
The main attraction of an ISA is that unlike a normal cash savings account, the monies grow tax free, which is particularly attractive for those who pay higher rates of tax and those seeking the best possible returns from their investment.
The change announced in the Budget will mean that rather than only being able to invest £3,600 into a cash-based ISA, up to £5,100 can be invested.
This additional allowance of £1,500 is effectively sheltered from income tax but whilst it sounds a generous increase, in reality it only offers investors a very limited tax break. For a higher rate tax payer, who earns say 3% on their account, it represents a tax saving of a mere £9 a year.
As well as putting monies into cash, ISAs also allow an investor to invest into stock market-based funds.
The main tax break offered here is that any growth is sheltered from capital gains tax, which is currently payable at 18% once you use up your annual allowance (again not many individuals use this up fully).
So, in summary, if you have made a cash investment into an ISA and are aged over 50, then come October you will be able to top this up to the maximum of £5,100.
If you are under 50, then the maximum you can contribute to a cash-based ISA is £3,600. If you wish to consider investing in something other than cash, then you can invest up to £7,200 now with a further £3,000 top up after October (again only if you are aged over 50). If you are under 50 then you will have to wait until next April before you take advantage of these new limits.
The Treasury has indicated that these moves would benefit around five million savers who currently use their full ISA allowance (it is estimated that a further 13 million people don’t even take advantage of the current maximum allowances).
Despite the new allowance, when you consider the overall tax savings, together with the fact that these new increased allowances are only just marginally more than the amount that could be contributed towards a PEP, you might be left feeling that the Chancellor could have done more.