Policy

Individual Savings Accounts

Individual Savings Accounts (ISAs) were introduced in 1999. All income and gains from ISA investments are exempt from UK income tax and capital gains tax.

Building societies are especially strong in the market for cash ISAs, where they account for nearly 37% of balances outstanding.

The annual subscription limits to ISAs are –

Maxi ISA

The overall maximum amount that can be invested each tax year is £7,000 of which:

- stocks & shares component can not be more than £7,000
- cash component can not be more than £3,000

Mini ISA

In each tax year:

- £4,000 can be placed in a stocks & shares mini ISA and
- £3,000 can be placed in a cash mini ISA.

But, you cannot subscribe to both a mini ISA and a maxi ISA in the same tax year.

New Rules From April 2008

The Treasury has announced changes to the ISA rules that will come into effect from April 2008. These are:

the distinction between maxi and mini ISAs will be abolished
Personal Equity Plans (PEPs) arrangements will be discontinued, and remaining PEPs will be rolled into ISAs
Child Trust Funds will be rolled into ISAs when children reach 18

The Treasury has also announced that transfers between cash ISAs and stocks and shares ISAs will be allowed from April 2008, but only in one direction - from cash to stocks and shares.

The BSA has highlighted several problems with this one-way-only approach. First, it benefits only higher rate taxpayers: there is no tax benefit to those on lower incomes holding equities inside - as opposed to outside - an ISA. (Cash ISAs give tax breaks to all taxpayers, including those on lower incomes.) As such it is likely to generate savings to the Exchequer - and this may have been a key driver of the Minister’s approach.

Second, it gives rise to new risks to the ISA holder: allowing one-way-only transfers, as the Treasury plans, means that errors of judgement or bad advice could never be rectified, without losing the ISA tax exemptions. The BSA considers it would be much better for consumers if they were allowed to transfer from equity to cash, as well as the other way round. As well as allowing ill-advised decisions to be reversed, this would also mean savers could more easily diversify their assets and benefit from the lower volatility offered by cash holdings.

New Annual Subscription limits from April 2008

In his Budget speech on 21 March 2007, the Chancellor announced that the annual subscription limit for cash ISAs would increase by 20%, from £3,000 to £3,600 and the limit for stocks and shares ISAs would go up by 3%, from £7,000 to £7,200. Both changes will take effect from April 2008. The BSA welcomed the move. As an example of what this means for savers, in each year savers will be able to suscribe to ISAs as follows:

(a) £3,600 to a cash account and £3,600 to a stocks and shares account; or
(b) £2,000 to a cash account and £5,200 to a stocks and shares account; or
(c) nil to a cash account and £7,200 to a stocks and shares account.

The new limits - and the other changes to the ISA regime set out above - are contained in draft regulations issued by the Treasury on Budget day. Changes to the PEP regulations, to allow PEPs to be rolled into ISAs, are set out in separate draft regulations.

Individual Savings Account and Building Societies

This BSA booklet is a guide to individual savings accounts. It can be downloaded here. Alternatively, you can get a copy from the BSA Consumer helpline on 020 7437 0655. It will be updated before April 2008 to reflect the changes that are due to come in then.

Individual Savings Accounts Booklet

To view the BSA's response to HM Treasury's Consultation Paper - Individual Savings Accounts: Proposed Reforms - follow the link below.

BSA Response