Still, we should not get too excited. The gain is illusory. What's happening is the effect of the much-reduced investment income in 2009-10 feeding through to PAYE codes for the new tax year in the form of higher tax-free allowances, thus boosting net pay. But, in reality, savers remain losers - nominal interest rates mean nominal interest received, whatever happens to take-home pay.
The government is a loser, too - it will have only nominal interest income to tax. Yet, in the way that only governments can, Gordon Brown is making a virtue out of this by grabbing the opportunity to substantially raise annual allowances for Individual Savings Accounts (Isas) in last week's Budget. Because interest rates are so low, the government can afford to seem generous since it loses little tax on interest that slips beyond its reach behind an Isa shelter.
Yet, in seeking to appear generous, the government may have lost something more important: the chance to sort out the major anomaly of Isas, which undermines the logic behind them - the rule on uninvested cash in stocks-and-shares Isas. The rule says cash is not a qualifying investment for a stocks-and-shares Isa. Therefore, any cash held within such an Isa must be there with the purpose of buying a qualifying investment. If it isn't, the Customs & Revenue can require the uninvested funds to be returned to the owner and the interest thereon to be taxed.
This rule has an unfortunate effect. Indeed, it's doubly unfortunate given that chancellor Alistair Darling is targeting the bigger Isa allowances at older savers, who should be taking risk out of their savings, not adding it. The trouble is that the uninvested cash rule almost compels savers to keep funds in equities whether they like it or not. In so doing, it ignores the fact of investment life that there may be times - the past 18 months, for example - when savers should be lightening their exposure to risk, not adding to it. So, at the very least, by raising the Isa limit by 40 per cent to £10,200 a year without scrapping the rule on uninvested cash, the chancellor is encouraging savers to act foolishly.
The uninvested cash rule is open to other criticism. It sits oddly with the existence of cash-only Isas. So, somehow the government says: "It's okay to have a cash Isa, but not to have cash in a stocks-and-shares Isa." Similarly, a saver can convert a cash Isa into a stocks-and-shares Isa, but not the other way around.
And it has never been made clear why cash left to slosh around in an Isa should be such a no-no. The argument that it deprives the government of legitimate tax revenue does not stand up to scrutiny. After all, the whole point of Isas is, as it were, to deprive the government of tax revenues because that is the incentive needed to persuade some people to save.
Of course, we can shrug our shoulders and say: "Well, that's how it is with Isas." They have been stuffed with anomalies ever since they were dreamed up as personal equity plans back in 1987 to encourage the Sids of this world - remember them? - to turn Mrs Thatcher's Britain into a nation of shareholders as well as home-owners.
Or we can take the cynical view and ask: how many Isa savers have actually been told to withdraw their cash from stocks-and-shares Isas and pay the tax thereon? The Customs & Revenue had no idea when I asked, though I suspect the answer is: not many. This much is implicit in another rule introduced when Isa regulations were tidied up in 2008 - that all interest on uninvested cash would be subject to a 20 per cent tax charge. In other words, the Revenue seems to say one thing, yet be happy with quite the opposite.
Still, it would be good to know what the situation really is, and that's not just because higher subscriptions will be at stake from October. Do savers ignore the uninvested cash rule, in which case effectively there is no difference between the treatment of cash and other investments within Isas? Or do they take it seriously, in which case they invest with one hand tied behind their back. But the real trouble is that, either way, the rule undermines the logic behind Isas. And that causes other anomalies to be exposed, such as the irrational rules that permit some types of equity investments but not others. Then, before you know it, all of the logic that holds Isas together crumbles.
But there is another way: do what should have been done with Isas in the first place. That is, allow Isa subscriptions to be invested in a really wide variety of assets and ring-fence the capital from taxation so long as it remains within its Isa wrapper. That gets rid of the silly uninvested cash rule and other anomalies that hinder Isas from being run in a way that's consistent with sensible investment practice. Then again, that might be too much to hope for. Pity.
