Brown extends Isa limits to 2010

Gordon Brown pleased savers and investors looking for tax breaks in his budget today when he announced that the tax-free allowance for the individual savings account (Isa) was to remain at £7,000 until 2010.

There had been plans to cut the maximum amount people could invest in an equity Isa from £7,000 to £5,000 a year, and the limits for cash Isas from £3,000 to £1,000, from April 2006.

The idea caused a storm at a time when the government had been impressing upon the public the importance of saving for the future, and in his pre-budget report in December 2004, the chancellor said he would consult on a stay of execution for the Isa limits. Today he announced that the limits would stay at today's levels for another five years.

Financial services companies welcomed the decision. Philip Williamson, chief executive at Nationwide building society, said: "The chancellor's decision to extend the Isa limits to 2010 is great news for savers. Giving people the chance to earn good rates of tax-free interest for a further five years could really boost the amount they save."

But, he added: "While we welcome the chancellor's announcement, we would like to see the current Isa become a permanent feature of the UK savings market as this would go a long way towards achieving the government's objective of encouraging more people to save.

"One in three people benefit from the tax-free incentives of Isas and for many of our customers their cash Isa is their first savings account. Our internal figures show that many of our customers are using the cash Isa as a flexible, safe and accessible 'tax-free' savings account," said Mr Williamson.

Richard Wastcoat, UK managing director of Fidelity Investments, said: "The decision to keep current Isa limits until 2010 is welcome and an important reminder that government has a role to play in encouraging people to save for their future."

However, he added: "We would also like to see the chancellor restore the dividend tax credit for Isas. We are in no doubt that the removal of the dividend tax credit has deterred some investors from taking out Isas."

Last year, the chancellor took away the 10% dividend tax credit on Isas, making them arguably less attractive to investors.

Mr Wastcoat said the chancellor should have taken things a step further by raising the maximum contribution limits for Isas rather than just keeping them at today's levels. "The Isa contribution levels have always been below those for personal equity plans (Peps), nor have the limits kept pace with inflation like many of the other allowances granted to the taxpayer," he said.