A £600 boost to savers, as £400 is taken away

A £600 boost to savers, as £400 is taken away

Millions of savers were given a Budget boost with the news that, from next year, they will be able to stash £3,600 a year in tax-free cash Isas.

At the moment, the maximum is £3,000 per tax year.

The amount people can invest in equity Isas (where your money is in stocks and shares) has also been increased - but only by a measly £200. That means the new annual subscription limit will be £7,200.

Both changes take effect in April next year, so they don't impact on accounts opened in the current tax year, which ends on April 5, or the 2007-08 tax year.

The changes will benefit around 5 million people who are making full use of either their cash or overall Isa investment limits, says the Treasury.

Launched in 1999 as a replacement for Peps and Tessas, individual savings accounts have proved a big success. More than 17 million people now have one, and more than £220bn has been invested in them.

The government also said that in April 2008 it is ending the confusing distinction between "mini" and "maxi" Isas. Savers will be able to invest in a cash Isa, an equity Isa or both. It will also allow transfers from cash Isas into equity ones.

For the millions of people who regularly put money into cash Isas, Gordon Brown's announcement is good news - even though the changes do not come in for a year.

"The cash Isa has undoubtedly been a success story to date, and raising these limits will help build.....continued below

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on this," says the Building Societies Association. But the £200 increase in the Isa overall ceiling will disappoint many investors. Fund management firms had been hoping for a lot more than that.

They voiced concerns that Mr Brown's enthusiasm for the cash accounts might put some people off investing in equities, which have traditionally delivered higher returns than cash.

Fidelity, the biggest manager of Isas and Peps, says it is "disappointed" to see such a small increase in the limit on equity Isas, adding: "Giving a significantly larger increase to the cash, rather than the equity, element of the Isa sends the wrong message to the market at a time when the government claims to be trying to encourage long-term saving."

Paul Ilott, at IFA firm Bates Investment Services, says that while raising the maximum permitted Isa contribution to £7,200 a year has to be welcomed, "it is still well short of the £8,542 figure it would have been, had the original £7,000 maximum kept pace with inflation ever since Isas were introduced in April 1999".

Savers who make maximum use of the Isa cash component from April 2008 onwards, will need to bear in mind the effect it will have on how much they can contribute to a stocks and shares Isa, which will fall from the maximum £4,000 currently available to just £3,600.

Carolyn Steppler, at accountants KPMG, was more blunt, saying Mr Brown "has given £600 with one hand and taken £400 away with the other".

Guardian Unlimited © Guardian News and Media Limited 2006