New cash ISA rules will see some savers hit with a 22% charge. It forms part of a significant overhaul of cash ISA regulations set to affect millions of savers across the country.
The key advantage of ISAs is that interest earned on savings remains free from tax. However, working-age savers are set to lose some of the benefits they currently enjoy.
Allowance reduced to £12,000
The £20,000 allowance is being reduced to £12,000 from next April. This means savers will only be permitted to deposit a maximum of £12,000 into these accounts.
Consequently, they will be unable to earn as much in tax-free interest. There will be the option to place the remaining £8,000 into stocks and shares accounts instead.
However, interest earned through these accounts will be subject to a 22% charge. Experts say the tax is designed to prevent savers from circumventing the rules by exploiting a loophole.
Impact on households and pensioners
This will leave households with more than £10,000 in savings weighing up the best way to manage their money. The new ISA rules will only apply to working-age households under 65.
Pensioners are being protected and can continue to benefit from the £20,000 allowance. Rob Morgan, chief investment analyst at Charles Stanley Direct, said: "From April 2027, the annual cash ISA allowance will be cut from £20,000 to £12,000 for those under 65, while the overall ISA allowance will remain at £20,000."
Older savers will retain the full £20,000 cash allowance.
Government confirmation
Money Saving Expert explained: "Savers who hold cash inside stocks and shares ISAs will be charged 22% on any interest earned on that cash from April 6, 2027, the government has confirmed."
The charge is designed to stop people using investment ISAs as a workaround to hold cash when the cash ISA limit is cut from £20,000 to £12,000 a year for under-65s from the same date.
