UK Chancellor to Introduce Tax on Cash Held in Investment Accounts

In a significant policy shift, the UK Treasury will introduce a 22% tax charge on interest earned from cash held within stocks and shares Individual Savings Accounts (ISAs) beginning April 2027. This move, announced by Chancellor Rachel Reeves, marks the first time cash within these investment accounts will be subject to taxation.

The new measure is designed to prevent savers from circumventing a reduction in the annual allowance for cash ISAs, which will be capped at £12,000 for individuals under 65 from April 2027, down from £20,000. The allowance for investments within stocks and shares ISAs will remain at £20,000 per tax year, a move intended to encourage investment in the stock market.

Under the new rules, any interest generated by cash held in a stocks and shares ISA will be taxed at 22%. This applies even to funds held temporarily, such as during periods of market volatility or while an investor decides on specific investments. Critics argue that this undermines the tax-free nature of ISAs and adds complexity to the savings system.

Financial industry experts have expressed strong disapproval, with some labeling the rules as 'draconian.' Jason Hollands, a managing director at BestInvest, stated that the measure "undermines the tax-free promise of ISAs" and likened it to "using a sledgehammer to crack a walnut." Rachael Griffin of Quilter noted that the change risks making ISAs more complicated for cautious savers and will result in a reduced net return for investors regardless of their personal tax circumstances.

Shadow Chancellor Sir Mel Stride criticized the policy as a "double whammy for savers," pointing out that it combines a reduced ISA allowance with increased taxation on savings interest. He argued that the government is penalizing individuals who have followed long-standing advice to save and invest.

There were initial concerns that money market funds, often held in ISAs, might also be subject to the tax, though clarification from HMRC is pending. The new regulations will also prohibit transfers from non-cash ISAs into cash equivalents, while allowing transfers in the reverse direction.