The way you can invest in Isas will change next April, and for under-65s that will means a reduced limit on the amount of money that can be saved tax-free in a cash Isa.
This week the new rules became clearer, sparking concern among investors that they may have to pay tax on some of their holdings.
Currently, all growth and other returns paid on holdings in a stocks and shares Isa are tax-free. Under rules outlined by HM Revenue and Customs, from April 2027 investors who have uninvested cash in a stocks and shares wrapper will face a 22% charge on any interest it earns.
It is one of several measures designed to stop people getting round the new limits on cash Isas.
What is changing?
The core idea of Isas is staying the same. They are tax-efficient accounts that can be used to hold stocks and shares or cash on deposit. A cash Isa operates like a savings account, your money earns interest which you can keep without paying income tax on it.
A stocks and shares Isa can hold a wide range of investments, such as investment funds or individual company shares; it can also hold uninvested cash, on which you earn interest, and things called money market funds. These funds are low-risk investments that offer similar returns to cash.
Each adult in the UK can put up to £20,000 into Isas each tax year, but how this can be distributed will be different from next year as part of the government’s attempt to encourage more people into investing.
Starting in the 2027-28 tax year, everyone under 65 will be limited to saving £12,000 a year in a cash Isa. Anything they want to put by above that sum will have to go into a non-Isa savings account, or they can use a stocks and shares Isa. Those aged 65 and over can continue to put the full £20,000 into a cash Isa.
Currently if you have a stocks and shares Isa and want to hold money and drip feed into the stock market, or just want to keep everything with the same provider, some of your money will be in a cash account. Subject to the provider’s rules, if you wanted you could hold the whole £20,000 in cash savings within a stocks and shares Isa account.
At the moment you would be unlikely to do that as the rates on offer are typically worse than the best-buy cash Isas.
However, HMRC wants to make sure that people do not use a stocks and shares Isa to bypass the new limit on cash holdings. To put people off, it has announced it plans to apply a 22% charge on any interest paid on the cash component.
This will be applied to any sum you hold in the cash element of your stocks and shares Isa account – even if you have not breached the new £12,000 cash Isa limit. Over-65s will face the same charge.
Currently it is possible to transfer money from a stocks and shares to a cash Isa, but under the new regime this will not be allowed if you are under 65. This will stop people putting £20,000 in a stocks and shares Isa then quickly moving it into a cash version.
The third change is a new limit on how much you can hold in money market funds. HMRC says that you cannot hold 100% of your stocks and shares Isa in this type of product, however old you are.
Can I use my personal saving allowance?
Every year you also have a tax-free allowance that lets you earn a set amount of interest before any tax is due. For basic-rate taxpayers it is £1,000 a year, while for higher-rate taxpayers it is £500. HMRC has confirmed you will not be allowed to use this to shield your money from the 22% charge.
The charge is set at 22% for all investors, not at their usual marginal income tax rate, which means for higher-rate taxpayers it is less than would be due on interest earned on savings in a non-Isa account. It will be paid to HMRC by the provider.
What does this mean for me?
Nothing if you have only cash Isas.
Lots of investors with stocks and shares Isas will have uninvested cash from time to time. Claire Trott, the head of advice at St James’s Place, says: “Holding cash or cash-like assets within a stocks and shares Isa is often a normal part of the investment journey. Investors may temporarily hold cash while deciding where to invest, when switching investments, or while waiting for money to be reinvested.”
If you hold a lot of cash in a stocks and shares Isa now you can still transfer it into a cash Isa (but as explained above that is going to change). From April 2027 you will have to withdraw it, or move it into investments if you want to avoid paying tax on the interest.
After the rule changes you can still use a stocks and shares Isa to invest in money market funds, and can put most of your money in them as long as it is below 100%. Investors will also continue to have access to other low-risk investments such as government bonds. Returns on these holdingwill still be tax-free.