A beginner's guide to ISA rule change

Posted on: 04 November 2009 by Mark O'haire

As part of this year's Budget, the Chancellor, Alistair Darling, increased the amount that can be invested tax-free into an Individual Savings Account (ISA).

So what does this mean for you?

What are ISAs?

ISAs are a tax-free savings wrapper. You can currently invest up to £7,200 each tax year, although this is rising to £10,200. The entire amount can be invested in a stocks and shares ISA.

Alternatively, up to £3,600 (rising to £5,100) can be put in a cash ISA with the remainder invested in stocks and shares.

When did the changes take effect?

The new allowance took effect on 6 October for those aged 50 or over (anyone who is 50 before the end of the current tax year – 5 April 2010 – will qualify for the new limit).

All other savers will have to wait until the next tax year starts.

What if I have already opened an ISA this year?

If you are over 50, you'll still be able to take advantage of the new higher limit, even if you've already opened an ISA this year. But ISA rules state you can only open one cash ISA and one stocks and shares ISA each tax-year so you'll have to stick with the same provider.

With cash ISAs, this shouldn't be a problem if you've opened an easy access account, as you can pay money in at any time. It may be more problematic if you opened a fixed rate account as most only permit you to make one deposit at the time the account is opened. Some providers have said they will allow the over-50s to use their extra allowance. Not all will though, so you need to check.

And if I haven't taken an ISA out this year?

Savers yet to invest this year's allowance are being urged to hold off for a few weeks. We've already seen some new deals launched ahead of next month's rule changes and more could follow suit. And remember, if you are under the age of 50 the maximum you can pay in to a cash ISA this year will remain at £3,600.

By Kate Murphy of moneysupermarket.com

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