A 1p savings loophole could help Brits swerve Rachel Reeves’ cash ISA crackdown. It is understood that the method will allow savers to avoid the upcoming restrictions and tax changes thanks to a flaw in the policy.
The Chancellor has confirmed that the cash ISA limit for under-65s will be reduced to £12,000 next April, while the overall £20,000 ISA allowance stays the same. The changes mean savers may need to reconsider how they split their allowance across the different ISA types, with some expected to be subject to a 22% charge on interest. However, a loophole will allow people to mimic cash savings in their stocks and shares ISA to sidestep the change.
As reported by The Telegraph, if savers max out their cash ISA limit of £12,000, they could put the remaining £7,999 of their allowance into money market funds in a stocks and shares ISA, as well as just 1p in the stock market. This will allow them to avoid a tax charge on interest.
Sources also said savers could put £19,999 into money market funds each year. These “cash-like” investments use low-risk assets to offer returns similar to a cash savings account.
New rules are designed to prevent savers from trying to get around the new ISA limits by holding cash in investment accounts. Some investors could be hit by a 22% charge on interest earned from cash held in stocks and shares ISAs.
Rachael Griffin, of wealth manager Quilter, said: “I hope we don’t end up in the pre-2014 scenario where we’re having to monitor different investments. These things take time to deliver. I’m not sure whether HMRC has quite appreciated the potential level of work that’s involved to implement these reforms by next April.”
A Treasury spokesman said: “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. These changes will make people better off and will not require anyone to move existing savings from their cash Isa.
“The vast majority of savers will continue to pay no tax on their savings and the Treasury and HMRC are working at pace with industry on the detailed rules and will update on next steps in due course.”