by Simon Wright

Created on: March 28, 2010

It seems that hardly a year goes by without changes being made to the ISA tax-free savings limits and this year is no exception. Individual Savings Accounts are available to savers in the UK and offer a great way to build your wealth without having the tax man take a cut of your hard earned money.

The UK government had previously raised the combined cash/stocks ISA annual limit from 7,200 pounds to 10,200 pounds. Savers could invest up to 5,100 pounds per year into a cash ISA and a further 5,100 pounds into a shares ISA. Or, alternatively, they could eschew the cash ISA option and put all 10,200 into a shares ISA     

Although this increased annual limit was announced in April 2009, the increased limit only comes into effect for those aged under 50 from April 2010. Additionally, in the March 2010 budget, Chancellor of the Exchequer Alistair Darling announced that the annual limits for both cash and shares ISAs will increase annually in line with inflation.

These yearly adjustments will be worked out with the help of the Retail Price Index (RPI). Whilst it’s good that we will see further increases in the amount that savers can invest in ISAs, this inflation-based model may prove somewhat confusing for ISA holders and will require good communication by banks so that savers know exactly how much they are allowed to deposit year on year.

The government have at least committed to announce the yearly ISA limit hikes four months in advance of the new tax year (so effectively by the end of November) so this will allow some time for the increases to be communicated.

However, many were hoping for more concrete increases in the allowable tax-free savings limits, to further entice individuals to save money and reduce the reliance on credit. Organisations such as price comparison site Moneynet have criticized the announced changes, pointing out that it is likely to result in a very meager increase in limits year on year and that the extra income earned by ISA holders will therefore be negligible. Nevertheless, I suppose any increase is better than no increase and it does come on the back of a couple of years where we have seen the annual ISA limits rise quite considerably.

Summary of 2010/11 ISA changes:

 - The increased 10,200 combined ISA limit now applies to everyone, rather than just the over fifties. That limit can be taken either as 5,100 pounds in a cash ISA and 5,100 in a shares ISA, or the full 10,200 can be put into a shares ISA.

 - In future years, the annual ISA limits will increase in line with inflation.

 - The new yearly limits will be announced at least 4 months before the start of the new financial year.

Sources:

http://www.thisismoney.co.uk/savings-and-banking/art icle.html?in_article_id=501703&in_page_id=7

http://www.guardian.co.uk/money/2010/mar/24/2010-bud get-isa-increase-inflation

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