Keir Starmer and Rachel Reeves (Image: KIN CHEUNG, POOL/AFP via Getty Images)
Experts have raised the alarm over an incoming tax due next year, condemning it as “a punishment aimed at diligent savers”.
The government is set to impose a 22% tax on interest earned from uninvested cash held in a stocks and shares ISA from April 2027, bringing it in line with the rate of savings interest tax. While the plans have long been the subject of speculation, they now appear firmly on course to proceed, subject to consultation.
The move forms part of a broader strategy to reduce the cash ISA limit to £12,000 next year, with transfers from a stocks and shares ISA back into a cash ISA also set to be prohibited. The overall annual ISA allowance of £20,000 will remain intact, however anything above £12,000 will be required to be placed into an investment ISA.
The Treasury has defended the measure, which is designed to encourage greater participation in investing.
It said this week: “We are reforming the cash ISA to encourage more people to invest in stocks and shares, which have historically performed better than cash savings, and we have retained the generous £20,000 tax-free limit.”
Experts cautioned that the latest change was likely to erode public confidence in ISAs still further, particularly among those seeking lower-risk options for their money.
Antonia Medlicott, founder and MD at London-based Investing Insiders, said it felt like savers were being punished.
Antonia Medlicott (Image: Investing Insiders)
Read more: Reeves rule change ‘means double HMRC tax is coming’
Read more: Upcoming Reeves change to HMRC tax means ‘check pension now’
She added: “I find these proposals deeply frustrating as taxing uninvested cash held in a stocks and shares ISA feels like a punishment aimed at diligent savers who genuinely want to invest their money. Every serious investor holds cash inside their stocks and shares ISA at some point.
“Whether it’s deciding what to buy next, waiting for a market dip, or rebalancing your portfolio, these are legitimate reasons to hold cash inside an ISA, and not people looking to use a tax loophole. This will heavily impact cautious investors who use money market funds, who will feel disincentivised against investing.
“There is a consistent pattern in recent ISA policy of designing rules around an imagined bad actor and then hitting ordinary people in the process. The final rules must be softer than the proposals currently suggest, or else this could result in cash being moved outside of an ISA. Ordinary people should be allowed to grow their money without the state taking a cut at every turn.”
Scott Gallacher, director of Leicester-based Rowley Turton, warned that faith in investment would take a significant knock as a result of the proposals.
He added: “ISAs are one of the great policy successes of successive governments, regardless of political colour. They are simple, trusted and widely understood. These changes risk chipping away at that confidence. Worse still, this policy risks deterring the very people the government says it wants to encourage: cautious savers who are on the fence about investing and may need a nudge.
“Cash ISA savers are unaffected by this particular charge, but someone who invests through a stocks and shares ISA and later needs to de-risk – perhaps because they lose their job, face a tax bill, or simply need greater certainty – could find their ISA cash subject to a charge, with no option of transferring it into a cash ISA. That is not pro-investment, it is anti-flexibility. If a stocks and shares ISA becomes a one-way door, some cautious savers may simply avoid investing altogether.”
Riz Malik, Independent Financial Adviser at Southend-on-Sea-based R3 Wealth, argued that greater public education on investing was urgently required.
He added: “The government wants to get Britain investing and many households are still sitting on large cash holdings, both inside and outside ISA wrappers. The government would make a more compelling argument if it helped educate the population that investing for the long term does not mean putting all your life savings into equities, and there are a range of options depending on your requirements and the level of risk you are prepared to consider. If the aim is to fill the coffers, a bit more carrot and a bit less stick are needed.”
Nouran Moustafa, practice principal and IFA at Roxton Wealth, remarked that “it feels like the system is moving the goalposts again”.
She added: “This feels like the government trying to push people into investing, but the danger is that it may do the opposite. People do not build investment confidence by feeling trapped or penalised for holding cash. Small cash balances in a stocks and shares ISA are often practical, not tax avoidance.
“People may be waiting to invest, holding fees, phasing money into markets, or simply nervous. Experienced investors also use cash tactically, especially during volatility. The bigger issue is trust. Reducing the cash ISA limit, restricting transfers back to cash, and potentially taxing uninvested cash creates another layer of confusion.
“For cautious savers, this could feel like the system is moving the goalposts again. I doubt this raises the sums expected, because behaviour matters. Some people will invest more, but others may simply save outside ISAs, delay decisions, or disengage completely. If the aim is to build an investment culture, education will do far more than pressure.”
Anita Wright, Chartered Financial Planner at Ribble Wealth Management, highlighted that it was a “tiny” tax, given that it would apply solely to the interest earned.
She added: “The government isn’t taking 22% of your cash. It’s a 22% tax on the interest that cash earns inside a stocks and shares ISA, bringing it in line with the savings tax rate coming in next April.
Nouran Moustafa (Image: Nouran Moustafa/Newspage)
“So on a small balance, the amount involved is genuinely tiny. If you’ve got a few hundred pounds sitting uninvested, the tax on the interest is pennies. The people who should pay attention are those parking large sums in cash inside an investment ISA and that’s exactly who the Treasury is aiming at. This is an anti-avoidance measure to stop people sidestepping the smaller cash ISA limit by hiding cash in the wrong wrapper.”
Eamonn Prendergast, Chartered Financial Adviser at Bromley-based Palantir Financial Planning Ltd, warned that many savers could find themselves bewildered by the changes.
He added: “This feels like a policy aimed at changing behaviour, but it risks creating confusion instead. Taxing uninvested cash within a stocks and shares ISA, alongside cutting the cash ISA limit to £12,000, is clearly designed to push people toward investing. But many investors hold cash temporarily for good reasons – whether managing risk or waiting to invest – and this could penalise sensible behaviour.
“For most people, the impact may be limited as many don’t use their full ISA allowance anyway. The bigger concern is confidence – constant rule changes risk undermining trust in ISAs. Without better education and guidance, cautious savers may simply move money into bank accounts or premium bonds rather than invest, which ultimately defeats the purpose.”
Harry Goodliffe, director of Winchester-based HTG Mortgages, warned that many people would lose faith in the government entirely.
He added: “Once the government starts taxing ‘tax-free’ ISAs, why should anyone trust them again? People have been told for years that ISAs were protected, simple and safe. Now the rules are changing, and it’s cautious savers who’ll get hit first. It sends the message that if the Government needs cash badly enough, no promise is really permanent.
“The government might claw back some money in the short term, but damaging trust in saving is a massive price to pay. Just another tax to add to the seemingly never-ending list.”