Increased ISA limits from 6 October

by Tax Faculty Team on 16.09.2009 04:39

Over 50s should benefit – but beware of some pitfalls

It was announced in the 2009 Budget that the Individual Savings Account (ISA) investment limits would be increased, and that those aged 50 and over would get the benefit of the higher limits from October 2009.

The October start date is fast approaching, and here we explain the new limits and how they will apply.

The new ISA allowances 

In each tax year investors may invest in a single stocks-and-shares ISA, a single cash ISA or in both a stocks-and-shares ISA and a cash ISA. The maximum amount which one person may invest is currently limited to £7,200 annually of which a maximum of £3,600 may be invested in a cash ISA.

The new annual subscription limit will increase to £10,200 of which a maximum of £5,100 can be invested in cash. The increased ISA limits are introduced by The Individual Savings Account (Amendment) Regulations SI 2009/1550.

These limits apply to everyone from 2010/11. They apply from 6 October 2009 for those who will be aged 50 or over during 2009/10 (ie on or before 5 April 2010). So from 6 October, those aged 50-plus can add to their 2009/10 ISA savings to bring them up to a maximum of £10,200 (with no more than £5,100 in cash).

People aged 50-plus – using the extra allowance

Although the annual limits are increasing, investors are still restricted to opening one cash and one stocks-and-shares ISA for the tax year. So what happens if you have already have an ISA for this year? You cannot open a new ISA of the same type, but you can open a cash ISA if you only have a stocks-and-shares ISA so far, or you can open a stocks-and-shares ISA if you only have a cash ISA. You can also top up existing ISAs – but there are some practical points to consider here.

It is possible that some financial institutions may take the commercial decision not to offer eligible investors the facility to top up existing ISAs to take advantage of the new limits from 6 October. Furthermore, some ISAs already opened by those who will be 50-plus in the 2009/10 tax year may have restrictions attached to them by the financial institution which do not allow further funds to be added.

In such cases, if the institution does not change its subscription rules, the investor will have to transfer the ISA to another institution in order to take advantage of the increased limits. The investor would be advised to check that penalties and loss of interest do not outweigh the potential advantages. Note that to retain the tax benefits and access the higher limits, the existing ISA should not be closed but must be transferred. This is because the ISA rules do not permit an investor to close one ISA and invest in a new ISA of the same type (cash or stocks-and-shares) even if the amount in the new ISA is within the limits for the tax year.

Finally, where the institution allows further investment, investors will need to understand what terms apply to the additional amounts invested. For example, where the original amount was invested at a fixed rate, a different rate may apply to the top-up.

Some figures to illustrate

If you have only a stocks-and-shares ISA for the current year at the moment, and you have invested the full amount possible of £7,200, you could take out a cash ISA for £3,000 to take advantage of the higher limit. However, you could also add £3,000 to your existing stocks-and-shares ISA, or do so after transfer to a new institution in the event that your existing stocks-and-shares ISA has restrictions. Or you could do a combination of the two.

If you only have a cash-only ISA for 2009/10 to date, and have invested the maximum of £3,600, you can increase your investment by adding up to £1,500 in cash to the same ISA, or up to £6,600 in a stocks-and-shares ISA, or a combination of the two – provided that the total overall does not exceed £10,200, the cash element does not exceed £5,100 and the stocks-and-shares element does not exceed (in this example) £6,600.  If the initial investment in the cash ISA was £3,000 or less, it would be possible to invest up to a total of £7,200 in a stocks-and-shares ISA then make up the balance to £10,200 by adding to the existing cash ISA, provided that the total cash element was £5,100 or less.

(Amended 22.9.09)