Savers face paying two separate 22 per cent tax charges as major changes to savings rules take effect from April 2027. The Government plans to cut the cash ISA allowance and impose a new levy on cash held within investment-based ISAs, while existing savings tax rates are also rising.
Currently, savers get a £20,000 annual deposit allowance that can be divided between cash ISAs and stocks and shares ISAs. Under the new rules, £8,000 of this will only be available for investment-based accounts, meaning savers can put up to £12,000 into cash ISAs. People aged 65 and over will keep the current £20,000 allowance, receiving the full allowance in the tax year they reach 65.
New 22% charge on cash in investment ISAs
To discourage people from holding cash within a stocks and shares ISA wrapper, the Government is imposing a 22 per cent tax charge on any interest earnings on cash held within investment-based ISAs. However, another 22 per cent levy could also hit savers, as several existing tax rates are hiked from April 2027.
Kirsty Stone, chartered financial planner at The Private Office, confirmed on the BBC Money Box podcast that some tax rates are "creeping up and up" and that many taxpayers "won't necessarily be aware of" the changes. In addition to the ISA changes, the tax paid on savings interest earned outside of tax-free wrappers is rising by two percentage points across all tax brackets.
Tax increases across all brackets
For basic rate taxpayers, the rate is increasing from 20 per cent to 22 per cent. Higher rate taxpayers will see their rate rise from 40 per cent to 42 per cent, while additional rate taxpayers face an increase from 45 per cent to 47 per cent.
The savings allowances that apply depending on income tax bracket remain unchanged. Basic rate taxpayers can earn £1,000 a year in cash savings interest outside ISAs, higher rate taxpayers £500 a year, and additional rate taxpayers have zero allowance.
Concerns over complexity and impact
Ms Stone warned that the new rules could make things confusing for savers. She said: "I think the easiest and simplest way to save money tax-efficiently has been an ISA arrangement." She added: "And so the complications here are something completely new and people aren't aware or prepared for it."
She said that historically the simplicity of ISAs has been "fantastic to engage people in saving", yet these extra regulations could "deter people from wanting to save because it feels more complicated".
Sarah Harrison, chief executive of the Building Societies Association, also raised concerns that the changes may not actually encourage people to get into investing. She said: "We support the Government's aim of helping more people to invest, but weakening cash ISAs could have the opposite effect."
The association is calling for the Government to pause the plans. Ms Harrison said: "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."
She pointed to research from the University of Bristol showing that 70 per cent of cash ISA holders oppose the overhaul. The full Money Box podcast is available on BBC Sounds.
