Savers may find a clever 1p trick to escape a clampdown on funds stashed in ISAs.
Starting April 2027, the annual cash ISA limit for individuals under 65 will drop from £20,000 to £12,000. However, the overall ISA allowance for under-65s will remain at £20,000, meaning one could potentially allocate £12,000 to a cash ISA and £8,000 to a stocks and shares ISA.
Alternatively, savers could fully utilize the £20,000 allowance in stocks and shares ISAs to promote investment and drive economic growth. Individuals aged 65 and above can still save up to £20,000 in a cash ISA.
Reports suggest that a 22% tax will be imposed on interest earned from cash in stocks and shares ISAs starting April 2027. Nevertheless, according to the Telegraph, this charge will only apply if all investable assets are held in “cash-like” investments, including money market funds.
In theory, one could deposit £12,000 in a cash ISA, £7,999.99 in cash within a stocks and shares ISA, and the remaining 1p in the stock market, taking advantage of this loophole.
HMRC had previously hinted at charging individuals with cash in stocks and shares accounts post this timeline, without specifying the rate.
A Treasury spokesperson emphasized the aim to encourage stock and share investments over cash savings, maintaining the £20,000 tax-free limit to benefit savers without requiring a transfer of existing Cash ISA savings.
Different types of ISAs include cash ISAs, stocks and shares ISAs, Lifetime ISAs, and innovative finance ISAs, with children having Junior ISAs. Certain ISAs have lower annual thresholds; for instance, only £4,000 can be saved annually in a Lifetime ISA.
Apart from the reduced cash ISA limit, there will be an increase in the tax rate on savings interest from April 2027. Basic-rate taxpayers will face a 22% tax on savings interest exceeding £1,000 annually, up from the current 20%. The tax for higher-rate taxpayers will rise to 42% from 40%, while additional rate taxpayers will see a 47% tax, up from 45%.
Individuals pay tax on savings interest beyond set thresholds, with ISAs providing tax-free benefits within the annual allowance.
