Rachel Reeves is reportedly planning to implement a new tax on interest earned from funds held in stocks and shares ISAs. Starting in April 2027, there will be significant changes to ISAs, including a reduction in the annual cash ISA limit for individuals under 65 from £20,000 to £12,000.
While the cash ISA limit will decrease, the overall ISA allowance for under-65s will remain at £20,000. This means individuals could 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. The aim of these adjustments is to promote investment and drive economic growth, with over-65s still able to save up to £20,000 in a cash ISA.
A recent report by the Telegraph has indicated that from April 2027, individuals will face a 22% tax on interest earned from cash held in stocks and shares ISAs. While HMRC previously announced the introduction of this charge, the specific rate had not been confirmed until now.
Rachel Vahey from investment platform AJ Bell expressed concern over the timing of these changes, urging a swift resolution to ensure compliance with the April 2027 deadline. A Treasury spokesperson emphasized that the reforms are designed to encourage more people to invest in stocks and shares, which historically offer better returns compared to cash savings, while maintaining the £20,000 tax-free limit.
The upcoming modifications will not require individuals to transfer existing funds from their Cash ISA, and most savers will continue to enjoy tax-free savings. Detailed rules are being developed in collaboration with industry stakeholders, with further updates expected in due course.
ISAs come in various types, including cash ISAs, stocks and shares ISAs, Lifetime ISAs, and innovative finance ISAs, with children having their own Junior ISAs. Some ISAs have lower annual limits, such as the £4,000 cap for a Lifetime ISA per tax year.
In addition to changes in cash ISA rates, it has been confirmed that the tax rate on savings interest earned in other account types will increase from April 2027. Basic-rate taxpayers will see their tax rate on savings interest rise from 20% to 22%, while higher-rate and additional rate taxpayers will face higher tax rates accordingly.
Tax is applicable on savings interest exceeding specific thresholds, with ISAs offering tax-free savings below the annual allowance.