From April 2027, the cash ISA allowance will be reduced and some cash holdings within stocks and shares ISAs will face a new 22 per cent tax on interest earnings, changes that financial experts warn many savers are not prepared for.
Cash ISA allowance reduction
Currently, savers can put up to £20,000 each tax year into ISAs, dividing the allowance between cash and investments as they choose. From April 2027, only £12,000 can be used flexibly, with the remaining £8,000 available only for investment-based accounts. People aged 65 and over will keep the current £20,000 allowance.
To prevent cash being held within a stocks and shares ISA wrapper, some cash holdings in these accounts will be subject to a 22 per cent levy on any interest earnings.
Industry concerns
Sarah Harrison, chief executive of the Building Societies Association, questioned whether the changes will have a positive effect. Speaking to the BBC's Money Box show, she said: "We support the Government's aim of helping more people to invest, but weakening cash ISAs could have the opposite effect."
She added: "We believe a sensible approach is for the Chancellor to pause the changes for two years, giving time to assess the full impact of other steps being taken to support people to invest with confidence." Harrison pointed to a University of Bristol study that found seven in 10 cash ISA savers opposed the changes, which are set to take effect in less than six months.
Expert warns of unpreparedness
Kirsty Stone, chartered financial planner at The Private Office, told BBC Radio 4 that while the changes may not hugely impact average savers who cannot maximise the full £20,000, they raise questions for those saving aggressively. She said: "People that are looking to save aggressively or are in a fortunate position to do that, then it will raise questions about how they go about that moving forward. But of course, the average person is just not able to maximise the full £20,000 at the moment, so it won't be hugely impactful."
Stone expressed concern that people remain unaware of the looming changes, saying: "I think the easiest and simplest way to save money tax-efficiently has been an ISA arrangement. And so the complications here are something completely new and people aren't aware or prepared for it."
She also noted that the traditional simplicity of ISAs, which have been completely tax-free, may be undermined by the new 22 per cent charge. "I think the simplicity of an ISA has been really fantastic to engage people in saving. Adding these nuances unfortunately might deter people from wanting to save because it feels more complicated," she said.
Interest tax rates rise
From April 2027, the rate charged on interest earnings will also increase by two percentage points across each tax band. For basic rate taxpayers in England, Wales and Northern Ireland, the rate will rise from 20 per cent to 22 per cent. Higher rate taxpayers will see their rate increase from 40 per cent to 42 per cent, and additional rate taxpayers from 45 per cent to 47 per cent.
