Savers could soon face a 20 per cent charge on cash held inside stocks and shares Isas, as HMRC considers ways to stop people using them to bypass new limits on cash Isas.
Industry sources say the tax authority is exploring an indirect levy on interest earned from cash sitting in these accounts, a move that would hit anyone who leaves money uninvested for too long.
The plans follow Rachel Reeves slashing the cash Isa allowance from £20,000 to £12,000 for under-65s from 2027, a policy aimed at pushing more money into UK stocks.
HMRC later confirmed that charges will apply to cash held inside stocks and shares Isas, though it has not yet revealed the rate.
Investment platforms believe HMRC may opt to reinstate a flat 20 per cent charge on interest accrued from cash balances within these accounts.
Such a levy would not be unprecedented. Before July 2014, stocks and shares Isas carried this exact charge on cash holdings, during a period when savers could put twice as much into investment Isas compared with their cash equivalents.
The Conservative government subsequently streamlined the system by making allowances equal, permitting up to £15,000 in either type of Isa.
This limit was later raised to the current £20,000 threshold during the 2017-18 tax year.
One industry source noted: “Given that this measure existed previously, it is perfectly possible it could end up at 20pc rate again.”
The source described potential implementation as a “nightmare” that would create costly administrative burdens for platforms.
Jason Hollands, managing director at Bestinvest, cautioned that the proposed charge represents an “indirect tax” that risks “undermining the tax-free promise of Isas”.
He argued that legitimate investors routinely hold cash for perfectly valid reasons.
“You have money in your account, you don’t often invest it immediately because you want to secure the allowance, and then decide where you want to invest it,” Mr Hollands said.
the proposed charge represents an “indirect tax” that risks “undermining the tax-free promise of Isas”.
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GETTYHe pointed to market uncertainty and the natural gaps between trades and dividend payments as situations where cash inevitably accumulates in portfolios.
Rather than imposing what he termed a “punitive charge”, Mr Hollands proposed a more measured approach: a three-month grace period allowing investors time to deploy their funds.
He also observed that when the 20 per cent levy previously existed, historically low interest rates meant it had minimal practical impact on most savers.
Tom Selby, director of public policy at AJ Bell, said there was “every chance” that HMRC would “revert to a 20pc tax charge on cash held in stocks and shares Isas”.
An HMRC spokesman confirmed that regulations would be established to prevent circumvention of the reduced cash Isa limit
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GETTYHe emphasised that reducing risk exposure is not exclusive to those aged 65 and above.
“Derisking isn’t just something that people aged 65 and over do anyone who has invested for a specific purpose will likely look to derisk into cash as they approach the point they need the money. Penalising those people with a charge seems extremely unfair,” Mr Selby said.
An HMRC spokesman confirmed that regulations would be established to prevent circumvention of the reduced cash Isa limit, including provisions addressing interest on cash holdings.
The spokesman added that details would be published ahead of implementation following discussions with stakeholders.