Isa limits spared in bid to encourage saving

Investors are set to save more than £7bn in tax over the next five years after the Chancellor finally backed down on proposals to cut the annual limits on Individual Savings Accounts (Isas) this week.

Investors are set to save more than £7bn in tax over the next five years after the Chancellor finally backed down on proposals to cut the annual limits on Individual Savings Accounts (Isas) this week.

Since Isas were first introduced in 1999, investors have been able to invest £7,000 a year tax-free in a stocks and shares Isa, or up to £3,000 tax-free in a cash Isa.

However, the limits were set to be reduced to £5,000 and £1,000 respectively, at the end of the current tax year in April. Although the tax-efficiency of the stocks and shares Isa was significantly reduced earlier this year, when the Chancellor elected to scrap the tax-credit on dividends, cash Isas have become increasingly popular.

According to the Inland Revenue, the amount of money going into cash Isas has risen from £11.6bn in 1999/2000 to more than £19bn in the last tax year. The average amount invested is almost £1,700. If Mr Brown's original proposals to cut the limits had gone ahead, the amount invested in Isas was expected to have more than halved, while the amount of tax paid by savers would have increased by more than £1bn a year.

Tony Vine-Lott, the director general of the Pep & Isa Managers Association, who has campaigned for extension of the Isa limits for the past five years, said he was pleasantly surprised by the news.

"When we raised questions about Isa limits in the summer, Ruth Kelly [then the financial secretary to the Treasury] said only that no decision had been made," he said. "So I was delighted to hear an announcement in the pre-budget report. It would have been nice if they had agreed to index-link the limit though, so that it increased every year."

Paul Knox, a tax director with Ernst & Young, said he believes the the move will prevent a further deterioration in the amount people save in the UK. "It will certainly encourage people to continue saving, when otherwise they may have not," he said.

But Paul Falvey, a tax partner with Grant Thornton, said the Government needs to go much further if it is going to address the problem of people's apathetic attitude towards saving in the UK.

"We don't save enough in this country, and Gordon Brown has done very little to encourage it," he said.