Savers have been able to put money into the cash component of an Individual Savings Account since Isas were launched in April 1999. The idea behind Isas was to encourage people to save by offering tax incentives but over the years the value of the incentives and the investment limits have changed.

The current rules

Cash Isas are one part of the Isa structure, the other being stocks and shares Isas. It is only possible to hold one cash Isa in each financial year. In the current tax year, 2008-2009, savers are allowed to put up to £3,600 into a cash Isa - half the £7,200 annual investment limit.

Interest on the money accumulates free of tax. Savers are theoretically free to withdraw their money at any time, though there may be a penalty to pay on notice or term accounts.

The rule changes

From the start of the next tax year on April 6 investors will be able to put more money into a cash Isa. The maximum permitted amount will rise by £1,500 to £5,100 - half the new annual investment limit of £10,200.

Special deal for older savers

However those aged 50 or over on April 5 2010 will be able to make use of these increased limits in the current tax year. From October 6 they can put up to £10,200 into a stocks and shares Isa or £5,100 into a cash Isa. This means those who have already invested the existing maximum of £3,600 into a cash Isa may be able to put in a further £1,500 in the current tax year.

The pitfalls

Not all Isa providers are offering this top-up facility. One reason for this is because implementing the top-up would require a complicated and costly change to financial groups’ systems in the middle of a financial year to determine which customers are eligible and which are not, followed by a further change back at the end of the year when all customers benefit from the new limits.

Another problem arises in cases where savers wishing to take advantage of a top-up hold a fixed rate cash Isa. Peter Shipp, of the Tax Incentivised Savings Association (Tisa), the Isa managers’ trade body, says: “In the case of fixed-rate products, these are normally offered for a limited period and when the offer closes that is it and no more money can be invested."

So someone who invested £3,600 in a fixed rate cash Isa at the start of the current financial year could find that the door is now closed to a top-up in this particular product. Since you can have only one cash Isa a year this could mean that you would not be able to benefit from the top-up regime.

Ways round the problem

Some banks and building societies have found a way of allowing savers to add money to their existing fixed-rate cash Isas without breaking the rules.

Others have created an umbrella cash Isa within which savers can hold an existing fixed-rate cash Isa and open a new top-up cash Isa.

If a provider doesn’t offer either of these solutions, savers could consider a transfer of their cash Isa to another financial group. However they would need to check both that their existing provider does not levy penalties for transferring out, and that their intended new provider allows transfers in.

The benefits

As some Isa providers have pointed out, changing their systems for a short six-month period will cost them millions of pounds. But the benefit of enjoying an additional £1,500 of tax-free interest for six months is worth about £5 at most to a basic-rate taxpayer.

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