Savers who hold cash inside stocks and shares Isas will face a 22% tax on interest from April 2027, under rules published by HMRC on Tuesday. The charge is designed to stop investors using the investment wrapper to hoard cash and bypass new limits on cash Isas – a change that has triggered fierce industry backlash, with critics arguing the decision is “riddled with unintended consequences”.
The reforms, announced as part of a consultation on a new first-time buyer Isa, follow last year’s budget in which the chancellor, Rachel Reeves, set out major changes to the Isa regime. Under the new rules, under-65s will be able to put only up to £12,000 a year into a cash Isa, down from the current £20,000 overall Isa allowance. Interest on cash held in stocks and shares Isas, previously tax-free, will now be taxed at 22%. Investors will also be barred from holding 100% of their stocks and shares Isa in money market funds, low-risk investments that mimic cash.
“HMRC will tax interest on cash held in stocks and shares Isas at 22% and introduce a new first-time buyer Isa.”
Meanwhile, the Treasury launched consultations on a first-time buyer Isa with no upper age limit – a break from the lifetime Isa (Lisa), which capped new savers at 40. The government said this recognises “that the age at which a first home is bought is rising”. The new account will offer a 25% bonus on savings, but paid only when a property is purchased, rather than annually. The much-criticised 25% penalty for withdrawing money for other reasons will be scrapped. The Treasury is also asking providers to comment on the current £450,000 price cap on eligible homes, pointing to a recent report that said the cap “ensures that the support goes to people who need it most”.
Rachael Griffin, tax and financial planning expert at Quilter, said the proposed first-time buyer Isa “marks a clear step towards creating a savings product that better…” – a partial verdict that leaves the full impact uncertain. With the end of the Lisa and a lower cash Isa limit already set, the government is reshaping the savings landscape. But the 22% tax charge on cash in stocks and shares Isas has raised questions about whether the reforms will genuinely encourage investment or simply create new pitfalls for savers.