Savers could potentially exploit a 1p loophole to sidestep restrictions on cash held in ISAs.
Starting in April 2027, the annual cash ISA limit for individuals under 65 will drop from £20,000 to £12,000. However, the overall allowance for under-65s will remain at £20,000, allowing savers to split their savings between cash ISAs and stocks and shares ISAs.
Alternatively, savers could invest the full £20,000 into stocks and shares ISAs in an effort to promote investment and boost economic growth. Individuals aged 65 and over will still have the option to save up to £20,000 in a cash ISA.
Recent reports indicated that savers might face a 22% charge on interest earned from cash holdings in stocks and shares ISAs beginning in April 2027. However, a new update from the Telegraph suggests that this charge will only apply if all investable assets are in “cash-like” investments, such as money market funds.
This means that theoretically, one could deposit £12,000 into a cash ISA, £7,999.99 in cash in a stocks and shares ISA, and the remaining 1p in the stock market.
HMRC had previously mentioned the possibility of imposing a charge on interest for those holding cash in stocks and shares accounts but had not confirmed the rate.
According to a Treasury spokesperson, the changes to the cash ISA aim to encourage more people to invest in stocks and shares, which historically offer better returns than cash savings. The spokesperson highlighted that the £20,000 tax-free limit remains intact, ensuring that most savers will not pay tax on their savings.
Different types of ISAs include cash ISAs, stocks and shares ISAs, Lifetime ISAs, and innovative finance ISAs, with children having Junior ISAs. Some ISAs have lower annual limits, like the £4,000 limit for a Lifetime ISA per tax year.
In addition to the reduction in the cash ISA rate, there will be an increase in the tax rates on savings interest earned in other types of accounts from April 2027. Basic-rate taxpayers will see their tax rate rise from 20% to 22% on savings interest exceeding £1,000 annually, while higher-rate and additional rate taxpayers will also face higher tax rates on their savings interest.
With an ISA, tax is only applicable on savings interest above the annual allowance. Savers are advised to stay informed about these changes for effective financial planning.
