The Isa allowance, currently set at £11,520 for the current tax year, will jump to £15,000 on 1 July, the biggest allowance hike since Isas were introduced 15 years ago.
The new savings vehicle, dubbed new individual saving accounts or Nisas, will also give savers more flexibility to save a higher amount of their savings in cash and broaden the scope of investments permitted for inclusion in the new accounts.
“Twenty four million people in this country have an Isa and yet millions of them would like to save more than the annual limits,” Osborne said yesterday.
The redesign will scrap the current system and allow savers to switch money freely between cash accounts and stocks and shares accounts.
Currently you can only move money from cash accounts to stocks and shares accounts – but not the other way around.
The Nisa will also allow all £15,000 to be saved in a cash account – triple the £5,760 permitted to be saved in cash Isas under the current system.
“Many savers may be struggling to find decent cash Isa returns in the current low interest rate environment,” AXA Self Investor’s Gordon Hull said.
“The news that they will be able to take out stocks and shares Isa as an alternative to a cash Isa and later transfer back to a cash Isa, if better rates become available, is great news.”
The Isa limit is set to rise by 3.13 per cent to £11,880 on 6 April this year but the allowance will jump again to £15,000 on 1 July under the rules announced yesterday.
The three-month lull is designed to give financial services providers time to update their systems and prepare for the change. The increase in the allowance is set to cost the exchequer £80m next year, rising to £230m and then £325m as people move taxable savings into Nisas.
The government also said it will raise the allowance in Junior Isas to £4,000.
The government also announced plans to consult on proposals permitting peer-to-peer loans to be held within Nisas. Lending Works boss Nick Harding said the move was a “significant milestone for our industry,” while the Peer-to-Peer Finance Association said it was a sign the loans were moving into the mainstream.