Darling increases ISA allowance
The amount of money you can put into an individual savings account (ISA) each year will increase from £7,200 to £10,200, it was revealed in chancellor Alistair Darling's 2009 Budget.
The new annual ISA allowance includes £5,100 that can be saved in a cash ISA – up from the current limit of £3,600. People aged 50 or over will be able to take advantage of the new limit from 6 October this year, while everyone else will have to wait until 6 April 2010.
So, the majority of savers will only be able to save up to £7,200 in an ISA, including £3,600 in cash, until the next tax year.
Chancellor Alistair Darling has defended the phased introduction of the new ISA allowance by saying this will “enable those who have retired or are beginning to prepare for retirement to move taxed savings into a tax-advantaged ISA, rewarding those who have saved by improving their returns”.
However, commentators branded the move as a “kick in the teeth” for the majority of savers.
Rumina Hassam, personal finance expert at uSwitch.com, says: “The government’s decision to increase the cash ISA limit by £1,500 to £5,100 for the over 50s is just another kick in the teeth for the majority of savers as they will have to wait even longer to benefit.
“There is no doubt that savers have been sacrificed as a result of the plummeting base rate, bringing savings rates to an all time low. However, this latest move could be too little too late as our research has shown that 4.3 million savers are already planning to ditch their ISAs this year, mainly due to plummeting interest rates.
"If all of these savers don’t have a sudden change of heart, providers are set to lose out on £9.5 billion as consumers withdraw their cash."
Around 17.1 million households in the UK do not use their cash ISA allowance meaning they have missed out on £2 billion of tax-free interest in the last year alone, according to Hassam.
So what will the new allowance mean in terms of the amount of additional interest you could earn?
At current interest rates, the annual benefit for a saver over the age of 50 putting in £5,100 this year equates to an additional interest of just £30.
If you opt for the highest currently available cash ISA rate of 3.61% gross AER for lump sum deposits you would earn £184.11 in tax-free interest if you used the new maximum cash ISA limit – that’s an additional tax-free interest of £54.15 compared to what you would earn using the current limit of £3,600.
However, at the lowest currently available cash ISA rate of 0.05% gross AER, the increase would only give you an additional tax-free interest of £7.50.
There are limits to how much you can invest in any tax year. For 2011/12, the limit is £10,680. Of that, the maximum you can invest in cash is £5,340 and the balance of £5,340 can be invested in shares (individual company shares or investment funds). If you don’t take the cash ISA allowance, you can invest up to £10,680 into a stocks and shares ISA.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.
Where APR is the rate charged for money borrowed, Annual equivalent rate is how interest is calculated on money saved. The AER takes into account the frequency the product pays interest and how that interest compounds. So, if two savings products pay the same rate of interest but one pays interest more frequently, that account compounds the interest more frequently and will have a higher AER.