Savers offered ‘workaround’ after Labour slashes tax-free allowance to £12,000

Hargreaves Lansdown has described the product as a “workaround” to Labour’s planned 40 per cent reduction in the Cash ISA limit.

From April, people under 65 will be able to place only £12,000 a year into a Cash ISA, down from £20,000.

Savings held outside an ISA could also be subject to the new 22 per cent tax rate once a person’s tax-free savings allowance has been used.

Hargreaves Lansdown has responded by launching what it says is the cheapest money market fund available in the UK.

The fund aims to deliver returns similar to a cash savings account while being held inside a Stocks and Shares ISA, where returns remain protected from tax.

The approach could undermine former chancellor Rachel Reeves’s aim of encouraging more people to invest their money in company shares.

Money market funds pool savers’ cash and place it in short-term deposits and debt issued by banks and governments. They are generally designed to provide relatively low-risk returns while allowing investors to access their money easily.

They are designed to deliver relatively low-risk returns similar to those on offer from traditional savings accounts, while keeping funds readily accessible.

To prevent savers from simply parking all their money in these cash-like investments within a stocks and shares ISA, the Treasury has introduced rules prohibiting holders from keeping 100 per cent of their wrapper in money market funds.

Yet this restriction contains a significant gap. As previously reported by Telegraph Money, investing as little as 1p in any other asset is enough to satisfy the requirement.

That single penny in a different holding would allow the remainder of a saver’s stocks and shares Isa to sit entirely in money market funds.

Hargreaves Lansdown said that just a few thousand of its clients held money market funds five years ago.

Since interest rates rose from historic lows to above 5 per cent from 2022 onwards, demand has surged to 25 times that level.

Over the past year alone, the broker reported a 35 per cent jump in appetite for these products, with close to £7billion flowing into money market funds during 2025.

Alex Lambert, of Hargreaves Lansdown, said: “Thinking about those clients who are using their £12,000 limit and then are still scared to invest and would use this as a workaround, we’ve invested quite heavily into our overall cash management range.”

Anna Macdonald, the firm’s investment strategy director, said: “We have already seen strong and growing demand. Interest has grown because of the cash Isa changes coming in from April.”

The fund carries an ongoing charge of just 0.06 per cent, equivalent to 60p for every £1,000 invested, making it the cheapest offering of its kind on the market.

Savers will also need to pay Hargreaves Lansdown’s 0.35 per cent platform fee alongside a £1.95 dealing charge. The broker anticipates the fund will deliver a yield of 3.95 per cent.

Rather than pushing savers towards equities, as Ms Reeves intended when she announced the cash Isa cut, the product risks funnelling even more money into low-risk, cash-like holdings.

Meanwhile, the Building Societies Association has urged Chancellor John Healey to postpone the reduced allowance by two years.

The industry body argued that the Government should give other measures aimed at boosting retail investment time to take effect before implementing such a substantial change.