Beginner's guide to: ISAs

Last month's Budget included a £3,000 increase in the annual ISA allowance which was good news for savers. However, there is confusion about the higher limit because it doesn't take effect immediately. Here we explain the new rules.

What are ISAs?

Individuals can invest up to £7,200 each tax year in an individual savings account (ISA) and returns are tax-free. This will rise to £10,200, although the new higher limit doesn't take effect until October 6 for savers over the age of 50. And anyone under 50 will have to wait until the 2010-2011 tax year, which begins next April, before they can take advantage of the improved tax-break.

The entire allowance can be invested in a stocks-and-shares ISA. Alternatively it can be split and up to 50 per cent can be put in a cash ISA – £3,600 currently, although this will rise to £5,100 when the new limit takes effect.

Why isn't the new limit being introduced straight away?

The Government said the reason for the delay is to give providers time to adjust their systems. However, it has faced criticism for not allowing all savers to benefit from the increased limit this year.

What happens if I'm over 50?

Anyone who is 50 before April 5 2010 will be able to take advantage of the higher allowance from October 6.

If you have already opened an ISA this year or are planning to do so in the next few months, you should be able to top it up when the new allowance takes effect. However, there may be exceptions, particularly if you are investing in a cash ISA.

There shouldn't be a problem with easy-access accounts as these allow deposits to be made at any time. However, many fixed-rate accounts only permit a single lump-sum investment at the time the account is opened. If you have, or are thinking of investing in a fixed-rate cash ISA and are over 50, you should check with the provider to see if it will accept top-ups later on.