New rules for Individual Savings Accounts (ISAs) are set to introduce a 22% charge on interest earned from uninvested cash held within Stocks and Shares ISAs, effective from April 2027. This move, clarified by HM Revenue and Customs (HMRC), aims to deter individuals from bypassing new limits on Cash ISAs by investing in stocks instead.
Currently, all growth and returns within a Stocks and Shares ISA are tax-free, with £18.57 billion held across these investment wrappers as of 2022. However, under the revised framework, any interest generated on cash held within these investments will be subject to the new charge. This applies regardless of whether the investor has breached the new, lower Cash ISA limit.
From the 2027-28 tax year, adults under 65 will face a new annual limit of £12,000 for contributions to Cash ISAs, while those aged 65 and over can still allocate their existing £20,000 annual allowance. The new 22% charge on uninvested cash in Stocks and Shares ISAs will apply to all age groups, including over-65s.
Another significant alteration is the restriction on transferring funds, which now prohibits individuals under 65 from moving money from a Stocks and Shares ISA into a Cash ISA. This measure aims to prevent investors initially depositing the full £20,000 annual allowance into a Stocks and Shares ISA before swiftly transferring it into a Cash ISA to circumvent the new cash limit.
HMRC has also stipulated a new limit on the proportion of a Stocks and Shares ISA that can be held in money market funds. This will prevent 100% allocation to these low-risk products, which have seen £10.3 billion invested as of 2022. It is essential to note that the Personal Savings Allowance (PSA) cannot shield income from the 22% charge, and higher-rate taxpayers will pay a lower rate than they would outside an ISA.