It's good to save and it's even better when you can do so without paying tax on the accumulated interest. In the UK, this feat can be achieved by opening an Individual Savings Account, more commonly referred to as an ISA. There are, however, limits on the amount that you can deposit into an ISA each year but the good news is that the UK government has just announced that the annual ISA limits are to be increased. This is the second successive year that the ISA limits have been increased and offer a rare crumb of comfort to savers at a time when savings rates are depressingly low.

Cash ISAs and Stocks & Shares ISAs:

When the government introduced ISAs in 1999, they created two types of ISAs. There are Cash ISAs, which are just a standard instant access savings account but with the added benefit of not being taxed, and then there are Stocks and Shares ISAs that offer people the opportunity of getting access to the stock market by buying into a fund that may contain equities, bonds and cash.

Initially, the annual combined cash/stocks ISA limit was 7,000 pounds. People could put a maximum of 3,000 pounds into their Cash ISA, plus a further 4,000 pounds into their stocks and shares ISA. Or, if they just wanted a stocks and shares ISA, then they could out the full 7,000 pounds limit into it. A further restriction is that you can only open one cash ISA and one stocks and shares ISA in any given tax year.

Changes to the ISA rules in 2008/09:

For the 2008/09 financial year, the UK government announced a first ever increase to the ISA annual limits. The cash ISA yearly limit was increased from 3,000 pounds to 3,600 pounds. The total combined ISA limit, however, only went up from 7,000 to 7,200, which meant that people who wanted to fully fund their cash ISA were forced to reduce the annual amount that they put into their stocks and shares ISA.

Other changes that were announced included:

- Child Trust Funds can be rolled straight into an ISA when the child turns 18.

- Cash ISAs can be transferred across to a Shares ISA, offering greater flexibility to ISA savers.

Futher changes announced in 2009 budget:

In April 2009, the UK Chancellor of the Exchequer, Alastair Darling announced a budget that included a number of measures that provoked criticism. However, one aspect of the budget that has been welcome is the news that the ISA limits are to be increased again.

The new combined cash/stocks ISA limit is to be 10,200 pounds. 5,100 pounds can be invested into a cash ISA, which would leave the individual able to also invest 5,100 pounds into their stocks and shares ISA. Or, alternatively, they could put the full 10,200 amount into a stocks and shares ISA.

This further increase is excellent news for savers but there is one additional detail that needs to be mentioned. Rather bizarrely, the Chancellor revealed that these new limits will be effective from October 2009 for people aged 50 or over but that the rest of us will have to wait until the 6th of April 2010 to benefit from them. That seems a bit arbitrary and unnecessarily complicated but never mind, the fact that the limits are being substantially increased is what really matters. It should mean that a significant proportion of UK households will be able to put their entire year's savings into tax-free instruments. The tax man may have a gloomy face at this prospect but the rest of us are smiling!

Sources:

http://en.wikipedia.org/wiki/I ndividual_Savings_Account#Type s_of_ISA

http://www.helium.com/items/49 5579-understanding-the-changes -to-tax-free-isa-rules-for-200 809

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