Individual Savings Accounts (ISAs) made more attractive

The amount that can be invested in an ISA is to be increased from the present £7,200 to £10,200 for 2010/2011 and will be index-linked in future.

ISAs allow interest on cash and certain other forms of investment income and gains to be realised in a tax-free environment.

Baker Tilly analysis

Individual Savings Accounts (ISAs) have permitted up to £7,200 per annum per person to be invested in investments, or up to £3,600 in cash.  The returns on these investments are free from income and capital gains tax.

Changes in the Pre-Budget Report increased these rates to allow those aged 50 or over to save £10,200 and £5,100 in investments or cash respectively.

This limit is to be extended to all ISA investors from 6 April 2010. In future, the limit will increase in line with inflation. This is clearly attractive where tax rates are otherwise rising and mean that an individual could save over £100,000 over a ten-year period with the income and gains entirely tax-free.

In detail

Tax-efficient investments are looking harder to come by these days, with the new restrictions on pension relief for high earners. 

In addition to enterprise investment schemes and venture capital trusts, ISAs remain attractive alongside pension contributions. Although the level of savings remains relatively low, it does mean that a large amount of tax-free savings can be built up over a period of years. The fact that the limit is to rise with inflation will also ensure that as incomes increase the level of savings, as a percentage of income, should remain stable.

Anything to encourage a move from a borrowing culture to a savings culture should be welcomed, but we would prefer not to see the sort of restrictions placed elsewhere, such as those on pension payments.