HMRC is planning to introduce a new ‘stealth tax’ on cash held in stocks and shares ISAs to prevent people from getting around the cash ISA allowance cut, experts have warned.
The taxman said a charge will have to be paid “on any interest paid on cash held in a stocks and shares or innovative finance ISA”.
It is also planning to prevent people from transferring their money from a stocks and shares ISA or innovative finance ISA – another type of investment ISA – to a cash ISA.
In her second autumn Budget on Wednesday, Chancellor Rachel Reeves announced that the cash ISA allowance will be cut from £20,000 to £12,000 for under-65s from April 2027, in a bid to boost investment in the UK stock market.
However, savers who put cash into a stocks and shares ISA instead and choose not to invest it or put it into “cash-like” investments will be penalised, HMRC said in its latest newsletter.
It said it will introduce “tests to determine whether an investment is eligible to be held in a stocks and shares ISA or is ‘cash like’”.
It did not clarify what constitutes a “cash like” investment, but it could for example include money market funds, which invest in ‘low-risk’ debt like government bonds and aim to provide stable returns like a savings account.
The new rules will only apply to investors under 65, and the investment industry will be consulted on the plans before they are legislated before April 2027.
Jason Hollands, managing director at investment platform Bestinvest, said the move comes as “no surprise”, but said that levying a charge on cash held in stocks and shares ISAs is “yet another stealth tax”.
“[It] will impact genuine investors who sometimes decide to park money in cash for a period of time awaiting investment, or because they are nervous about the market environment,” he said.
“The ‘tests to determine whether eligible investments are ‘cash like’ will throw doubt about access to money market funds within stocks & shares ISAs and could even bring short-dated bonds into question. More uncertainty lays ahead.”
Holland said that while different providers have their own fee structures, Bestinvest does not currently apply fees to cash balances, so the industry will need to “wait for more details” to see how this charge would be levied.
LISA changes are coming
The government also confirmed in its Budget that it is intending to replace the Lifetime ISA (LISA), a product used to help first-time buyers save for a home or retirement.
HMRC has now clarified that the new product will remove the withdrawal penalty attached to the LISA by changing when you get the bonus on it and how it can be spent, it confirmed in its newsletter.
It said: “The government will consult on introducing a new, first time buyer only product that will provide the bonus when a person uses it to buy a house, removing the need for a withdrawal charge and giving savers flexibility in case their circumstances change.”
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Almost one million LISA accounts were held at the end of 2024 (around 964,000), official figures show, with over £2.3bn in them.
The product allows savers to put away up to £4,000 per year for their first home or retirement, and the government adds a 25 per cent bonus to their contributions, up to a maximum bonus of £1,000 per year.
But the LISA has been criticised for its complexity and cost to the taxpayer, with MPs saying it disproportionately helps wealthier savers who can afford to put away more.
Savers are also subject to a withdrawal charge of 25 per cent, but this is charged on the whole withdrawal, so you can end up paying more than you put in.
For example, if you paid in £4,000, you’d get a £1,000 top up, but if you then withdrew all the cash, you’d be charged 25 per cent on the whole £5,000 – so £1,250.
The replacement product from the government will remove this issue by not applying the bonus until the savings come to be spent on a first home.
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