Savers face 22% charge on cash under new ISA rules

Savers face a new 22% tax under plans to change ISAs change from 6 April 2027.

The levy is expected to be charged on interest earned from money kept in investment ISAs – also known as stocks and shares ISAs.

The move is to encourage more people to invest their money rather than keeping it sitting in cash.

Here is what we know about the ISA changes that will take effect from the tax year 2027/28.

What the new ISA tax rules mean for savers

Under the current rules, interest earned in both cash and stocks and shares ISAs is currently tax-free.

However, the new rules are set to see a 22% tax on interest earned from money held in a stocks and shares Isa.

It means that if you help £5,000 in an investment ISA paying 3% you would currently get £150.

Under the new rules, you’d pay £33 through the 22% tax and only get to keep £117.   

Interest earned from savings held in a cash ISA would still be tax-free.

The government is also closing off potential loopholes. Savers won’t be able to use low-risk investments that offer similar returns to savings accounts to get around the new rules, such as money market funds.  

What else is changing under new ISA rules?

The changes come after it was announced in the Autumn Budget there would be a cut to the current cash Isa allowance.

From April 2027, the annual limit will reduce from £20,000 per year to £12,000 per year.

However, over 65s will be exempt from the changes.

It means savers will have less cash-free allowance on top of new charges.

Why are the rules on ISAs changing?

The government wants to encourage more people into investing money rather than holding large sums in cash.

This is because investment returns over the longer term typically beat those offered by cash.

At the same time, more investment into UK companies can help spark innovation and development to better the economy.

In reality, most people earning an average wage would struggle to save £20,000 a year in cash.

However, the rules could hurt people that come into a lump sum of cash, for example, through inheritance and want to keep it in a low-risk account for the short term.

How much money should you keep in cash?

It is a good idea to keep at least three months’ worth of income in an easily accessible account. This can help you cover unforeseen emergencies such as a car repair or get you through a job loss in the short term.

However, if you are saving towards a longer-term goal – such as a deposit for a house – investing the money can help you reach your target sooner than keeping the money purely in cash.