Savers who keep cash inside stocks and shares ISAs will face a 22 per cent tax charge on any interest earned under sweeping new ISA reforms confirmed by the Treasury.
The changes form part of Rachel Reeves’s wider overhaul of the ISA system, which ministers say is designed to encourage more people to invest rather than hold large amounts of money in cash savings.
At last year’s Budget, Chancellor Rachel Reeves reduced the annual cash ISA allowance from £20,000 to £12,000, arguing the move would encourage more people to invest and direct more savings into the UK economy.
However, concerns emerged that savers could sidestep the restrictions by holding cash within stocks and shares ISAs instead.
Details of the Government’s response were revealed in a document obtained by the Financial Times, which outlined three key principles that will underpin a broader ISA overhaul.
The reforms form part of a wider effort by ministers to encourage investment over cash savings and close potential loopholes in the system.
Under the plans, cash held within stocks and shares ISAs will be subject to a 22 per cent tax charge on any interest earned.
The Treasury has also confirmed that people 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 Rachel Reeves’s decision to exempt pensioners from the reduced cash ISA limit.
The first proposal would introduce a flat 22 per cent levy on interest earned on cash balances held within stocks and shares ISAs.
The second would prevent savers from transferring money from investment ISAs back into cash ISAs, although transfers from cash ISAs into investment products would still be allowed.
The third rule relates to money market funds, which invest in short-term bonds and are often viewed as a lower-risk entry point into investing.
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While these funds would not be banned, investors would no longer be able to hold them as their entire ISA portfolio.
HMRC said a complete ban on money market funds “would hamper normal investor behaviour”.
These measures follow the government’s sweeping ISA reforms announced in last November’s Budget, which included capping the annual cash allowance at £12,000 for those under 65, reduced from the previous £20,000 limit.
The restrictions on holding cash within investment ISAs are designed to stop savers circumventing the new rules.
Ministers hope the changes will direct more money towards capital markets, improving long-term outcomes for savers whilst channelling additional funds into listed equities and the domestic economy.
However, ISA providers have pushed back against the proposals, warning they would prove difficult to implement and could undermine the straightforward, tax-free nature that has made these accounts popular.
HMRC said a complete ban on money market funds “would hamper normal investor behaviour”
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Industry figures have expressed concern about the implications of the new framework.
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 charges.
Rob Hillock, head of personal financial planning at Broadstone said: “For many savers, particularly younger investors with wider time horizons, the hope is that this will significantly improve long-term returns.
“However, there is a risk that some individuals become uncomfortable holding investment risk if they feel their ability to move back into cash has been reduced.
The changes form part of a broader effort by ministers to encourage more people to invest rather than hold large amounts of cash in savings accounts
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“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.”
Commenting on the Government’s confirmation of its new ISA reforms, Simon Harrington, Head of Public Affairs at PIMFA, said: “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.
“When this policy was announced in late November, it was justified on the basis that substantive changes made to the ISA regime would be made in service of getting more people to invest who currently do not.
“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.”