Governemnt plans to reduce the amount people can save tax-free each year will hit people on low and middle incomes more than those on high ones, researchers have claimed.

The Government plans to reduce the amount people can save in an ISA from April 2006 to £1,000 from £3,000 for a mini ISA and to £5,000 from £7,000 for a maxi one.

Internet bank Intelligent Finance said the new threshold would have hit almost half the people who took out a mini cash ISA last year, affecting almost 3.5 million savers.

By contrast, just 23 per cent of those who put money into a maxi ISA during the 2003/2004 tax year would have been hit, the equivalent of 500,000 people.

The group added that last year, people paid an average of £2,020 into a mini cash ISA, twice the new limit, but just £3,360 was invested in maxi ISAs, well below the £5,000 limit.

Intelligent Finance said mini cash ISAs had been popular with people on low to middle incomes, with those in lower social groups two and half times more likely to take out a cash mini ISA than a maxi ISA.

It said more than 1.1 million people from low to middle income groups saved more than £1,000 into a mini cash ISA last year.

Grenville Turner, chief executive of Intelligent Finance, said: "ISAs are now established, popular savings vehicles. The proposed cuts in the mini cash ISA threshold will affect far more savers than the changes to maxi ISAs."

He added the decision could also have an impact on retirement saving, as one in five people who took out an ISA said they were doing so to boost their income when they stopped working.

The research also found that 90 per cent of people who expressed an opinion thought the current ISA allowance was either about right or should be increased. ICM Research questioned 1,000 people by telephone during January.

Wednesday April 28, 2004