HM Revenue and Customs (HMRC) has outlined significant changes to Individual Savings Accounts (ISAs), including the introduction of a 22% tax on interest generated from cash held within Stocks and Shares ISAs. This measure, set to take effect from April 2027, is designed to discourage savers from using investment wrappers to circumvent new, lower limits on standard cash ISAs.
Currently, up to £20,000 can be saved annually across various ISA types, with returns remaining tax-free. However, from April 2027, individuals under 65 will see their annual cash ISA allowance reduced to £12,000. The new tax on cash interest within Stocks and Shares ISAs directly targets a practice where some providers allowed substantial cash holdings alongside investments, with any interest remaining untaxed. Furthermore, investors will face restrictions on holding 100% of their Stocks and Shares ISA in money market funds, which offer cash-like returns but are considered low-risk investments.
Alongside these changes, the Treasury has launched a consultation on a new First-Time Buyer ISA, intended to replace the existing Lifetime ISA (LISA). A key difference is the removal of the LISA's 40-year upper age limit for new savers, with the new account available to anyone over 18. This acknowledges the increasing age at which many individuals are able to purchase their first home. The new ISA will continue to offer a 25% government bonus, but this will be paid only upon property purchase, rather than annually. Crucially, the controversial 25% penalty for withdrawals not used for a first home will be abolished, a feature of the LISA that often resulted in savers losing some of their original capital.
The consultation also seeks feedback on the property price cap for the new First-Time Buyer ISA, which currently stands at £450,000 – a figure unchanged since the LISA's introduction in 2017 despite significant house price inflation. While a recent report cited by the Treasury suggests this cap ensures support reaches those most in need, experts like Rachael Griffin from Quilter argue that the unchanged cap does not reflect current housing market realities. Rachel Vahey, Head of Public Policy at AJ Bell, expressed concerns that the overall reforms introduce complexity, reduce flexibility, and may deter new investors, potentially leading them to stick with traditional cash savings.
These reforms follow major changes announced in last year's budget by Chancellor Rachel Reeves, including the eventual end of the Lifetime ISA. The government's stated aim appears to be encouraging investment in stocks and shares, while simultaneously refining support for first-time buyers. However, industry voices suggest the new rules could create additional friction between different savings and investment products, potentially complicating financial planning for many UK households.
What this means for you: If you currently hold significant cash in a Stocks and Shares ISA, or plan to, you will face a 22% tax on any interest earned from April 2027. First-time buyers over 40 may benefit from the new ISA with no age limit, but the property price cap remains a key consideration. For those under 65, the annual cash ISA allowance will be reduced.
Source: HM Revenue and Customs, The Treasury, Quilter, AJ Bell, Building Societies Association