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In a shocking turn of events, Rachel Reeves has confirmed the ISA tax that the Treasury previously deemed ‘nonsense’.
From April 2027, savers could face a 22 per cent tax on interest earned from uninvested cash held in a Stocks and Shares ISA.
What changes are being made to ISAs?
The Autumn Budget confirmed several well-publicised ISA changes for the 2027/28 tax year.
From April 2027, the overall tax-free ISA allowance will remain £20,000, but the rules will change for under-65s.
Under-65s will only be able to pay up to £12,000 into a Cash ISA each tax year, rather than investing the full £20,000 allowance as before.
The remaining £8,000 will need to be placed in another type of ISA, such as a Stocks and Shares ISA.
However, in a further twist to the new rules, a 22 per cent tax on interest earned from uninvested cash held in Stocks and Shares ISAs may be imposed from April 2027.
This would bring the rate in line with the existing savings interest tax and reduce the benefit of holding cash in a Stocks and Shares ISA.
The proposals also include a ban on transferring funds from Stocks and Shares ISAs back into Cash ISAs as a means of circumventing the reforms.
What could the ISA changes mean for savers?
The Government is concerned that people may use Stocks and Shares ISAs like cash ISAs by leaving money uninvested, allowing them to bypass the £12,000 Cash ISA limit and continue earning tax-free interest.
For someone holding only a few hundred pounds before investing, the cost is likely to be minimal.
However, those holding larger cash balances in a Stocks and Shares ISA may feel a more noticeable impact.
If you already invest through a Stocks and Shares ISA, it is worth checking how much cash is currently sitting uninvested in your account.
A small cash buffer can be useful for platform fees or buying opportunities, but holding large amounts uninvested may become less tax-efficient over time.
These plans are not due to take effect until April 2027, so you can still put up to £20,000 into a Cash ISA this tax year if you wish, but you should ensure that your investment strategy accounts for upcoming changes.
Reviewing your tax-efficient investment plan
Planning ahead can help you organise your money and reduce the risk of being affected by the proposed tax on uninvested cash in Stocks and Shares ISAs.
If you are unsure how best to manage tax on your ISAs, speak to one of our experienced team members for guidance on tax-efficient planning.
Get in touch today for advice on how to use tax-efficient investments within your wider personal tax plan.