HM Revenue and Customs (HMRC) has confirmed a new 22% charge on interest earned from cash held in stocks and shares ISAs, set to take effect from April 2027. The levy is designed to prevent savers from circumventing new cash ISA limit rules, which will reduce the annual cash ISA allowance from £20,000 to £12,000 for individuals under the age of 65.
Key Changes to ISA Rules
Under the new regulations, the cash ISA limit for savers aged 65 and over will remain unchanged at £20,000. However, for those under 65, the overall ISA allowance will stay at £20,000, meaning savers can allocate up to £12,000 to a cash ISA and the remaining £8,000 to other types of ISAs, such as stocks and shares ISAs or innovative finance ISAs. The Government states that these changes are intended to encourage investment, as the limit for non-cash ISAs will remain at £20,000.
A factsheet published on the HMRC website confirms that the 22% levy will apply to interest earned on cash holdings within stocks and shares ISAs. Additionally, savers will not be permitted to hold 100% of their non-cash ISA portfolio in Money Market Funds, which are cash-like assets investing in short-term debt securities. The new rules also prohibit transferring £20,000 to a non-cash ISA and subsequently moving those funds to a cash ISA.
Industry Reactions
The announcement has drawn mixed reactions from industry experts. Simon Harrington, head of public affairs at the Personal Investment Management and Financial Advice Association, expressed scepticism about the effectiveness of the changes. “We remain sceptical that these changes will have any real effect on consumer investment behaviour and fear they will do the opposite. Far from encouraging take-up, they risk making the stocks and shares ISA, the very wrapper the Government wants people to use, less attractive,” he said.
Andrew Gall, head of savings at the Building Societies Association (BSA), welcomed the clarity provided by the Government but stressed the need for sufficient time for savers and institutions to adapt. “It is vital that savers have clear information and sufficient time to understand how the changes will affect them and the choices available to them from April 2027. Building societies also need certainty on the final rules so they can update systems and communicate with their members well ahead of implementation,” he stated.
Andrew Prosser, head of Investments at InvestEngine, warned that the complexity of the new rules could deter savers. “Our worry is that instead of encouraging investing, this could end up putting people off. If stocks and shares ISAs become more complex and less straightforward, some savers may just disengage altogether – which would go against the whole point of trying to build a stronger investing culture in the first place. What we really need is to improve financial education and make it more accessible – that would do far more to encourage people to invest than simply restricting how they use their savings and would be a more effective way of building a healthier investment culture in the UK,” he commented.
Implementation Timeline
HMRC has indicated that a technical consultation with the industry on the draft legislation will commence shortly, with regulations expected to be laid in the autumn. The changes are scheduled to take effect from April 2027, giving savers and financial institutions time to prepare for the new rules.
