Rachel Reeves plans to introduce a new levy on interest earned from cash kept in stocks and shares ISAs, as per recent reports. ISAs are set for significant changes in April 2027, with the annual cash ISA limit for individuals under 65 being reduced from £20,000 to £12,000. Despite this reduction, the total ISA allowance for those under 65 will remain at £20,000, allowing individuals to split their savings between cash and stocks and shares ISAs.
The adjustment aims to promote investment and boost economic growth by encouraging more people to invest in stocks and shares. Individuals over 65 will still have the option to save up to £20,000 in a cash ISA. Additionally, a 22% charge on interest earned from cash held in stocks and shares ISAs is expected to be implemented starting April 2027, as revealed by a recent report in The Telegraph.
HMRC had previously indicated that individuals holding cash in stocks and shares accounts would face an interest charge, without specifying the rate. Rachel Vahey from the investment platform AJ Bell expressed urgency in resolving this issue to align with the proposed timeline. The Treasury emphasized that the reforms aim to incentivize investment in stocks and shares, which historically offer better returns than cash savings, while maintaining the £20,000 tax-free limit.
The various types of ISAs include cash ISAs, stocks and shares ISAs, Lifetime ISAs, and innovative finance ISAs, along with Junior ISAs for children. Some ISAs have lower annual limits, such as the £4,000 cap on contributions to a Lifetime ISA each tax year. Additionally, the tax rate on savings interest earned in other account types will increase from April 2027.
Basic-rate taxpayers currently pay 20% tax on savings interest exceeding £1,000 annually, which will rise to 22%. Higher-rate taxpayers face a 40% tax on savings interest over £500 per year, increasing to 42%, while additional rate taxpayers paying 45% on all savings interest will see this rate climb to 47% from April 2027. Tax is applicable on savings interest above set thresholds, with ISAs offering tax benefits up to the annual allowance.
