UK Treasury Imposes 22% Tax on Cash in Investment ISAs, Affecting Over-65s
New levy targets interest earned on cash held in investment accounts starting April 2027, despite unchanged ISA limits for older savers.
The UK Treasury will introduce a 22% tax on interest earned from cash held within investment ISAs starting April 2027. This new charge applies even to savers over 65, who will retain their full £20,000 cash ISA allowance but will not be exempt from the levy.
The measure, announced by the Treasury, aims to discourage younger savers from holding cash in investment ISAs and instead encourage investment in assets that aim to grow money. Under the new rules, individuals under 65 will be able to deposit a maximum of £12,000 into a cash ISA, with the remaining £8,000 of their allowance permitted in stocks and shares ISAs. Those aged 65 and over will continue to have a £20,000 allowance for cash ISAs, a measure intended to accommodate their preference for safer, cash-based savings.
However, the 22% tax on interest earned from cash held in investment ISAs will be applied universally, regardless of age or the reason for holding cash. This blanket approach has drawn criticism from industry leaders who have described the rule as 'draconian' and 'disappointing'.
Critics argue that holding cash within an investment ISA serves legitimate purposes for older investors, such as de-risking portfolios during periods of market volatility, covering fees, or preparing for large purchases. These investors may prioritize capital preservation over high returns, making them more likely to hold a larger portion of their assets in cash-like investments. The new tax will penalize this cautious strategy.
Despite the criticism, a Treasury spokesperson stated that holding cash long-term in a non-cash ISA to gain tax-free interest is not considered investing. The spokesperson added that these changes are designed to redirect individuals towards investments that promote wealth growth. They also noted that the Building Societies Association and Nationwide support the move. Savers will still be able to hold up to £12,000 in a cash ISA, and those 65 and older will maintain their £20,000 allowance for cash ISAs.