The Government is making several changes to some savings accounts
Consumer advocate Martin Lewis has spoken about a new tax charge set to hit some savers. Chancellor Rachel Reeves announced in her Autumn Budget some sweeping changes to ISA tax allowances that will shake up how Brits build their savings. Currently, these popular savings accounts offer complete tax-free status, allowing savers to stash away up to £20,000 annually across cash ISAs, stocks and shares ISAs and innovative finance ISAs.
You currently can split your allowance between these accounts as you see fit. But Labour’s shake-up means that from April 2027, just £12,000 of this limit can go into either type of ISA. The leftover £8,000 must be funnelled into stocks and shares ISAs, as part of a push to drive more Britons towards investment. Those aged 65 and over will dodge these restrictions, keeping their existing allowance intact.
However, April 2027 will bring additional changes, including a fresh tax targeting particular ISA savers. A Government document stated that several measures will be introduced “to avoid circumvention of the lower limit for cash ISAs”.
Among these is “a charge on any interest paid on cash held in a stocks and shares or Innovative Finance ISA”. An Innovative Finance ISA allows you to invest in peer-to-peer lending, whereby funds are loaned to individuals and companies via digital platforms.
New tax charge looming
Mr Lewis addressed the incoming HMRC charge during his BBC podcast. He said: “The Government is trying to get people to hold money in shares more than in cash, so it has cut the cash ISA limit. It has done a couple of things, of which this is one, to effectively stop people from effectively using a shares ISA as a cash ISA.
“When you have an investment platform, you tend to do it by depositing cash in there and then investing that cash, so they have access to facilities that pay cash, and some of them pay interest. What some people do is they simply hold cash inside a shares ISA and its tax-free, like a cash ISA is.
“The Government has said to prevent that, they are going to add a tax charge onto cash held inside shares ISAs for under 65s, from 2027.” However, ISA holders are being left in the dark about crucial details.
Mr Lewis said: “It is unspecified how that tax charge will work. There are some dangers here, because if you want to take your money out of the market for a certain period to invest in something else, and you’re going to hold it for six weeks, it seems pretty unfair that you would have tax charge.”
He clarified the Government’s true target: “If you are doing it to jemmy the system, and you’re effectively going to use your extra £8,000 allowance that you get on shares to hold cash in a shares ISA, that’s what the Government is trying to stop. My suspicion is there will be a consultation on exactly how they do it and how long you have to be holding cash for it to be taxed, and what the tax will be. But we’re not there yet, we just don’t know the rules for that yet.”
What other new restrictions are coming in on ISAs?
The Government is bringing in other measures from April 2027 to prevent savers from keeping cash savings in a stocks and shares ISA. These include prohibiting transfers from stocks and shares and Innovative Finance ISAs to cash ISAs.
There will also be new “tests” to determine if an investment qualifies to be held in a stocks and shares ISA, to ensure it is not “cash like”.
