HMRC announces 22% tax on cash interest held in stocks and shares Isas

HM Revenue and Customs will apply a 22% tax on cash interest earned inside stocks and shares Individual Savings Accounts, part of a broader package of Isa reforms announced Tuesday that also includes a new first-time buyer account with no upper age limit [1]. The tax on cash interest held in stocks and shares Isas is designed to prevent savers from using investment wrappers to circumvent new cash Isa limits taking effect in April 2027 [1]. From that date, savers under 65 will be restricted to placing a maximum of £12,000 per year into a cash Isa, a move the government says is intended to encourage investment in equities [1]. Stocks and shares Isa providers have historically permitted customers to hold uninvested cash alongside their portfolios, with the interest accruing tax-free [1]. Under the new rules, all such interest will be taxed at 22%, and investors will be barred from holding 100% of their stocks and shares Isa in money market funds, which are low-risk instruments offering cash-like returns [1]. Individual Savings Accounts were first introduced in the United Kingdom in 1999 and have since expanded to include four account types: cash Isa, stocks and shares Isa, innovative finance Isa, and the lifetime Isa [2]. Each taxpayer currently has an annual investment limit of £20,000, which can be allocated across the different account types [2]. The accounts are exempt from income tax and capital gains tax on investment returns, and no tax is payable on withdrawals [2]. The Treasury also launched a consultation on a new first-time buyer Isa, which will be available to anyone aged over 18 [1]. This marks a departure from the lifetime Isa, which restricted new savers to those under 40 [1]. The Treasury acknowledged that the change reflects the rising age at which people purchase their first home [1]. The new product will retain a government bonus of 25% of the sum saved, but the bonus will be paid only at the point of property purchase rather than annually, and the 25% withdrawal penalty that applied to the lifetime Isa will be eliminated [1]. The £450,000 property price cap, unchanged since the lifetime Isa launched in 2017, remains in place [1]. Rachael Griffin, tax and financial planning expert at Quilter, said the proposed account "marks a clear step towards creating a savings product that better reflects the realities facing aspiring homeowners, but there are issues still to be ironed out" [1]. She noted that the £450,000 cap has not been adjusted despite rising house prices [1]. Rachel Vahey, AJ Bell's head of public policy, criticized the broader reforms. "Rather than minimise friction between saving and investing, these reforms reduce flexibility, entrench the divide between cash and investment accounts and introduce tax charges and complex age-related allowances," she said [1]. Vahey added that the changes are "riddled with unintended consequences" and "do little to encourage new investors" [1]. The Building Societies Association welcomed the stocks and shares Isa rules, while others warned the added complexity could deter savers from using the accounts [1].