SAVERS are bracing for a brutal crackdown as the taxman prepares to slash cash allowances and slap penalties on those trying to protect their hard-earned money.
In a move branded a “hidden Budget raid”, the Government is introducing strict new measures to prevent savvy savers from using Stocks and Shares ISAs to hide their cash.
Currently, you can stash up to £20,000 a year into any type of ISA – Cash, Stocks and Shares, or a mix – without paying a penny in tax on the interest or returns.
But that freedom is about to be slashed.
Under plans announced in the Budget, the annual allowance for Cash ISAs will be cut to just £12,000 for anyone under the age of 65.
These changes are set to kick in from April 2027.
While the total tax-free limit stays at £20,000, the Government wants to force that remaining £8,000 into the stock market to help boost the struggling UK economy.
Experts were quick to spot a potential workaround to the new rules.
They said savers could simply open a Stocks and Shares ISA, deposit the extra £8,000, but leave it sitting there as cash rather than buying risky shares.
But HMRC has moved quickly to shut this loophole down.
Guidance on the taxman’s website warns that strict rules are coming “to avoid circumvention of the lower limit for cash ISAs”.
For example, if you are under 65 and have already hit the £12,000 cash cap, you will not be allowed to transfer more from a Stocks and Shares ISA or an Innovative Finance ISA back into a Cash ISA.
Plus, if you try to use an investment ISA as a place to park cash, any interest earned on that cash could be hit with penalties or charges.
Experts at AJ Bell have warned that HMRC may reintroduce a 20% levy on interest from cash held inside investment ISAs.
Cash in stocks and shares ISAs used to subject to a flat 20% charge until July 2014.
Bringing it back will just erode the interest you earn while your money sits uninvested.
Tom Selby, director of public policy at AJ Bell, told the Financial Times there was “every chance” that HMRC could do this.
An HMRC spokesman said: “Rules will be introduced to avoid circumvention of the lower limit for cash Isas, including where interest is paid on cash held within an account.
“The detail of the changes to the rules will be publicised in advance of the change and following discussions with stakeholders.”
How could you be hit?
Depending on your ISA platform, uninvested cash held in a Stocks and Shares ISA earns different interest rates.
For example, £10,000 held as cash in an ii stocks and shares ISA currently earns 2.75% a year (about £275).
The same amount held as cash with Trading 212 earns 4.05% a year (about £405). Rates can change and may vary by account type.
These rates can change and may vary by account type.
But, if a 20% levy were applied to interest on ISA-held cash, it would significantly reduce returns.
On Trading 212’s current rate, the charge would be £81 on £10,000, £162 on £20,000 and £243 on £30,000.
On ii’s 2.75% rate, the charge would be £55 per £10,000.
Jason Hollands, managing director at investment platform Bestinvest, said the charge risks “undermining the tax-free promise of Isas”.
He said: “It is perfectly reasonable for a genuine investor to have periods when they are holding cash.
“You have money in your account, you don’t often invest it immediately because you want to secure the allowance, and then decide where you want to invest it.
“There are periods where people come out of the markets because the outcome is uncertain.
“Between trades and the payment of dividends you will have cash sat around in a portfolio.
“A more elegant way than just having a punitive charge would be to have a time limit.
“If the objective is to stop people who are never going to invest gaming the system then you could introduce a three-month grace period to get something invested.”
Who won’t be affected?
There is one group protected from the raid.
The Government confirmed that over-65s will retain the full £20,000 annual cash ISA allowance.
This means pensioners can continue to keep all their tax-free savings in safe, interest-bearing cash accounts without being forced to risk their capital in the stock market.
However, for everyone else, the message from the Chancellor is clear – if you want the full £20,000 allowance, you have to be willing to invest.
How are ISA rules changing?
CURRENT RULES:
- Total Limit: £20,000 per year.
- flexibility: You can put all £20k in Cash, all in Stocks, or split it however you like.
- Transfers: You can freely move money between Cash and Stocks ISAs.
FROM APRIL 2027 (Under 65s):
- Cash ISA Limit: Slashed to £12,000.
- Stocks & Shares: You can use the remaining £8,000 here to reach the £20k total.
- The Trap: You cannot simply hold “cash” inside a Stocks ISA to avoid the limit. You may face charges on interest if you do.
- Transfers: You will be blocked from moving investment pots back into Cash ISAs.
FROM APRIL 2027 (Over 65s):
- No Change: You keep the full £20,000 Cash ISA allowance.
