Savings: Automatic increase in ISA threshold will benefit millions

For the first time since ISAs were introduced in 1999, the maximum amount of money that can be paid in is to rise automatically each year. The Chancellor had already announced an increase from 6 April in the amount that can be saved in an ISA each tax year from £7,200 to £10,200 – half of which can be held in cash– but his move to automatically uprate ISA thresholds by the rate of inflation came as a bit of a surprise.

ISAs though have proved a real hit with the public, a total of 19 million Britons have an ISA and up to £270bn is invested. "ISAs are a successful way to encourage long-term saving and this is a welcome step," Ian Sayers, the director general of the Association of Investment Companies said.

" But we urge the Government to announce the new annual ISA limits as early as possible to allow ISA providers sufficient time to prepare for the new tax year."

But cash savings rates are so low that even increasing thresholds by inflation is unlikely to make much difference. "If you put the extra cash in the best-paying ISAs currently available, earning around 3 per cent interest, you would only save a paltry 76p in tax, hardly a vote winner, however you wish to dress it up," Andrew Hagger, from the financial information website Moneynet.co.uk, said.

"It's a token gesture that is likely to cost providers more to administer than it will actually deliver to beleaguered savers."

What is more, the fund management group Fidelity said that generally only high earners used the full ISA allowance. "Britons are not saving enough, and increasing the ISA limit will not by itself encourage new saving from those who most need to put more aside," Tom Stevenson, Fidelity's investment director said. "We believe further incentives are needed."

One such incentive is the Government's Savings Gateway, which will now launch nationwide in July. The scheme means the Government topping-up the savings of low-income groups by 50p for each pound saved. People qualify for the Savings Gateway if they are in receipt of beneifts or tax credits and have an income below £16,040 a year. A maximum of £25 each month can be saved in the account and the government top-up starts after two years.