Savers who keep cash inside stocks and shares ISAs will be hit with a 22 per cent tax charge on any interest earned, under sweeping reforms to the ISA system confirmed by the Treasury — a move that has drawn sharp criticism from the savings industry.
The plans, details of which were revealed in a document obtained by the Financial Times, form part of Chancellor Rachel Reeves’s broader overhaul of the ISA system, designed to push more money into investments and away from cash savings. At last year’s Budget, Reeves reduced the annual cash ISA allowance from £20,000 to £12,000 for those under 65, arguing it would encourage more people to invest. The new measures are intended to close a loophole that would have allowed savers to sidestep the cap by simply holding cash within a stocks and shares ISA instead.
The reforms rest on three key principles. The first introduces a flat 22 per cent levy on interest earned on cash balances held within investment ISAs. The second prevents savers from transferring money from investment ISAs back into cash ISAs, though transfers in the opposite direction would remain permitted. The third concerns money market funds — lower-risk investment products that operate similarly to cash — which will no longer be permitted to make up an investor’s entire ISA portfolio, though HMRC stopped short of banning them altogether, saying a complete prohibition “would hamper normal investor behaviour.”
The Treasury also confirmed that savers aged 64 will regain access to the full £20,000 cash ISA allowance from the start of the tax year in which they turn 65, following Reeves’s decision to exempt pensioners from the reduced limit.
Industry figures have reacted with concern. Brian Byrnes, director of personal finance at Moneybox, said the changes “introduce new charges, restrictions and eligibility rules within stocks-and-shares ISAs, making one of the UK’s most important investment products significantly more complex than it is today.” Alex Campbell, director of external affairs at Freetrade, warned of “unintended consequences,” suggesting platforms might reduce or scrap interest payments on cash held in investment ISAs to shield customers from the charges.
Rob Hillock, head of personal financial planning at Broadstone, said the reforms could improve long-term returns for younger investors but warned that restricting the ability to move back into cash might make some savers uncomfortable holding investment risk. “The key challenge will be ensuring savers understand both the opportunities and risks involved, so that investment decisions are driven by personal circumstances and financial goals rather than tax considerations alone,” he said.
Simon Harrington, head of public affairs at PIMFA, was more blunt. “We remain disappointed that the government has chosen to introduce such draconian anti-avoidance measures and, by extension, further complexity into the ISA regime, with little to no evidence that consumers will behave as these measures assume,” he said. “We remain sceptical that these changes will have any real effect on consumer investment behaviour and fear they will do the opposite. Far from encouraging take up, they risk making the Stocks and Shares ISA, the very wrapper the government wants people to use, less attractive.”
