Rachel Reeves plans to introduce a new levy on interest earned from cash stored in stocks and shares ISAs, according to recent reports. Starting in April 2027, ISAs are set for significant changes, including a reduction in the annual cash ISA limit for individuals under 65 from £20,000 to £12,000.
Despite the lower cash ISA limit, the overall ISA allowance for under-65s will remain at £20,000. This means individuals can allocate £12,000 to a cash ISA and £8,000 to a stocks and shares ISA or invest the full £20,000 in stocks and shares alone. The objective behind these adjustments is to promote investment and boost economic growth, while those aged 65 and over will still be able to save up to £20,000 in a cash ISA.
The reform was confirmed in last year’s Budget announcement. A recent report by the Telegraph suggests that as of April 2027, individuals could face a 22% charge on interest earned from cash held in stocks and shares ISAs. HMRC previously indicated that a charge would apply to interest earned from cash in stocks and shares accounts but had not specified the rate.
Rachel Vahey, from investment platform AJ Bell, expressed concerns about the tight timeline for implementing these changes, urging for swift resolution. The Treasury emphasized that the cash ISA reform aims to encourage investing in stocks and shares, which historically offer better returns than cash savings, while maintaining the £20,000 tax-free limit. The vast majority of savers are expected to continue tax-free savings, with ongoing collaboration between HMT, HMRC, and industry stakeholders on refining the rules.
In addition to cash ISAs, other ISA types include stocks and shares ISAs, Lifetime ISAs, and innovative finance ISAs, with children having Junior ISAs. Some ISAs, like the Lifetime ISA, have lower annual limits, such as a £4,000 cap per tax year.
Apart from the cash ISA adjustments, there will be an increase in the tax rate on savings interest from April 2027. Basic-rate taxpayers will see their tax rate rise from 20% to 22% when earning over £1,000 in savings interest annually. Higher-rate and additional rate taxpayers will also face higher tax rates on savings interest from April 2027.
It’s important to note that tax is applicable on savings interest above specific thresholds, with ISAs offering tax-free savings up to the annual allowance.
