UK Treasury Faces Backlash Over New Tax on Cash Held in Investment ISAs for Over-65s

The UK Treasury has announced a new tax on interest earned from cash held in investment ISAs, a measure that will affect investors over the age of 65, despite them retaining their full £20,000 annual allowance. Starting April 6, 2027, individuals aged 65 and over will face a 22% levy on interest accrued on cash within these accounts. This change has drawn criticism from industry leaders who have described the rule as "draconian" and "disappointing."

The Treasury stated the new charge is intended to prevent younger savers from circumventing upcoming ISA reforms. Under the new rules, savers under 65 will have a maximum allowance of £12,000 for cash ISAs, with the remaining £8,000 of their allowance permitted in stocks and shares ISAs. Investors over 65 will maintain their £20,000 allowance, as they tend to favor safer cash holdings over riskier investments.

However, the new tax will apply universally, regardless of an investor's age or their reasons for holding cash within an ISA. This includes holding funds for paying fees, selling investments before a significant purchase, or receiving dividend income. The Treasury argues that holding cash long-term in a non-cash ISA to gain tax-free interest is not considered investing and aims to encourage greater participation in growth-oriented investments. A Treasury spokesperson noted that while savers can still hold up to £12,000 in a cash ISA, and those over 65 maintain their £20,000 allowance, the goal is to steer individuals towards investments that generate capital growth.

Industry bodies, including Nationwide and the Building Societies Association, have indicated support for the Treasury's position, emphasizing the goal of promoting actual investment growth. Cautious investors, particularly older savers, often use cash within stocks and shares ISAs to de-risk their portfolios during periods of market volatility. This new tax will impact their ability to manage risk by holding cash, a strategy they rely on due to their lower capacity for investment risk compared to younger savers.

As an alternative, older savers can still hold a substantial portion of their portfolio, up to 99 percent, in low-risk money market funds, which provide some exposure to less volatile investments without being subject to the same specific cash ISA interest tax. The changes are set to take effect from April 2027, impacting how all ISA holders manage their cash reserves and investment strategies.