Rising limits for ISAs

ISA allowances are set to rise in the new tax year, providing an additional incentive for savers. During the current tax year (2010-2011), investors can save up to £10,200 in an ISA. However, from 6 April 2011, ISAs will be linked to inflation. Increases will be based on the Retail Prices Index (RPI) for the September preceding the beginning of each tax year on 6 April. The index-linking plan was originally announced in the Labour government’s March 2010 Budget, and was later confirmed in June by the incoming coalition government. Subsequent speculation over the coalition’s plans to cut public spending had led to fears the annual amount available to save in ISAs would be frozen. However, despite taking the decision to cut tax relief on pension contributions, the government still appears keen to encourage individuals to save. The calculation for ISA limits is therefore now linked to inflation, specifically the Retail Price Index (RPI) as measured in September each year. For September 2010, the Office for National Statistics confirmed that RPI was 4.6%, so, once applied to the current limit and rounded up to the nearest £120, this equates to a rise of £480. The maximum annual contribution into an ISA in the new tax year will therefore be £10,680.

This can be invested in a stocks-and-shares ISA, or up to half the amount – £5,340 – can be saved in a cash-only ISA, with any remaining allowance available for investment in a stock-and-shares ISA. According to the Investment Management Association (IMA), net ISA inflows have averaged more than £400 million since October 2009 and 47% of investors would invest more if the allowance was increased further. Meanwhile, according to HM Revenue & Customs, more than 14.9 million individuals subscribed to ISAs in the last tax year, although this was slightly lower than the previous year, when almost 15.2 million individuals subscribed. ISAs are tax-efficient vehicles that allow individuals to save and invest without having to pay income tax or capital gains tax. ISAs can be a good way for people to start saving, or to add to their existing savings and investments. If you cannot afford to take advantage of the full annual allowance, it is still worth putting away what you can via a monthly savings plan, which can start from £50 a month. Looking ahead at the annual allowance, it is worth remembering one of the golden rules of ISA investing - use it or lose it.