HM Revenue and Customs has announced new ISA reforms that include a 22% tax on interest earned from cash held within stocks and shares ISAs, alongside wider changes to savings rules and the introduction of a new first-time buyer ISA with no upper age limit, as part of a broader consultation on how tax-free savings products are used across the UK.
Tax Charge On Cash Held Inside Investment ISAs
Under the new proposals, interest generated on cash balances held within stocks and shares ISAs will be subject to a 22% tax charge. The measure is intended to prevent cash savings from benefiting from tax advantages designed for investment products.
HMRC also plans to limit the share of stocks and shares ISAs that can be held in money market funds, which are often used as cash-like, low-risk holdings within investment accounts. The rules aim to reinforce the distinction between cash savings and investment activity within ISA structures.
New First-Time Buyer ISA Plan
A new ISA for first-time buyers will be introduced and made available to individuals aged 18 and over, with no upper age limit. This replaces previous schemes that included age restrictions.
The account will provide a 25% government bonus when funds are used towards purchasing a home. Unlike earlier versions of similar schemes, the bonus will only be paid at the point of property purchase rather than annually.
Withdrawals for non-property purposes will not carry the previous penalty structure, marking a change in flexibility compared with earlier ISA products.
Cash ISA Contribution Limits To Change
From April 2027, annual cash ISA contributions for under-65s will be capped at £12,000. The overall ISA allowance will remain at £20,000 per year, but the structure will place tighter limits on cash holdings within tax-free accounts.
The aim is to encourage a greater shift towards investment-based ISA products rather than cash savings.
Industry Response To The Changes
Financial experts have raised concerns that the new framework could add complexity for savers, particularly those managing both cash and investment components within ISAs. Some advisers have also questioned whether unchanged property price caps in the new first-time buyer ISA remain appropriate given recent house price growth.
Others note that while the reforms may clarify how cash is treated within ISAs, they could reduce flexibility for users who rely on the accounts for both saving and investing.
Wider Context Of ISA Reform
The ISA system has remained largely unchanged for several years, despite growing use of cash holdings within investment accounts. The latest reforms form part of an ongoing effort to update the structure of tax-free savings and ensure consistent treatment across different types of financial products, with further consultation expected before final rules are confirmed.
