Rachel Reeves plans to introduce a new levy on interest accrued from cash held in stocks and shares ISAs, as per recent reports. The ISA landscape is set for a significant overhaul in April 2027, with a notable reduction in the annual cash ISA limit for individuals under 65 from £20,000 to £12,000.
Despite the cut in the cash ISA limit, the total ISA allowance for under-65s will remain at £20,000. This means that individuals could potentially save £12,000 in a cash ISA and allocate the remaining £8,000 to a stocks and shares ISA. Alternatively, one could invest the entire £20,000 allowance in stocks and shares, aligning with the objective of promoting investment and fostering economic growth.
The adjustment was confirmed in the previous year’s Budget, with a recent Telegraph report suggesting a 22% charge on interest earned from cash within stocks and shares ISAs starting April 2027. HMRC had previously indicated the imposition of a charge on interest for cash held in such accounts but had not disclosed the specific rate until now.
Rachel Vahey, representing investment platform AJ Bell, emphasized the urgency of resolving this issue to meet the April 2027 deadline. The Treasury aims to incentivize investment in stocks and shares by revamping the cash ISA, maintaining the £20,000 tax-free limit, and benefiting most savers without necessitating the transfer of existing savings from their Cash ISA.
Various types of ISAs exist, including cash ISAs, stocks and shares ISAs, Lifetime ISAs, and innovative finance ISAs. Children can also access Junior ISAs. These accounts have differing annual limits, with, for instance, a £4,000 cap for Lifetime ISAs per tax year.
In addition to the cash ISA alteration, there will be an increase in the tax rate on savings interest earned in other account types from April 2027. The tax rates for savings interest will rise for different taxpayer categories, with basic-rate taxpayers facing a 22% tax on earnings exceeding £1,000 annually, higher-rate taxpayers encountering a 42% rate for amounts over £500, and additional rate taxpayers paying 47% on all savings interest above thresholds.
Taxation on savings interest is applicable above specific thresholds, with ISAs offering tax benefits up to the annual allowance. These changes aim to encourage investment and responsible financial planning for individuals across various income brackets.
