In a move that could significantly affect UK savers, HM Revenue and Customs (HMRC) has proposed a cap on interest earned within cash ISAs, as part of a broader plan to tighten restrictions around the tax-free savings product. The measure is being considered to prevent savers from bypassing newly introduced ISA limits.
The proposals come amid broader reform efforts by the Labour Party government, which is seeking to implement stricter anti-avoidance rules ahead of the planned cash ISA allowance cut in April 2027. Critics, however, argue that the changes could undermine confidence in ISAs and reduce incentives for long-term investment.
Cash Isa Interest Cap among New Measures under Review
At a recent policy meeting, HMRC floated the idea of capping interest on cash held within stocks and shares ISAs, according to Citywire, to discourage savers from using the product in ways not aligned with its original investment-focused purpose. The aim, officials said, is to prevent circumvention of new limits by moving money between different types of ISAs.
Although the level of the potential cap remains unspecified, it was raised alongside other measures that would ban transfers from stocks and shares ISAs or Innovative Finance ISAs into cash ISAs. The government is also considering charging tax on any interest earned on cash held within non-cash ISAs.
The scope of the proposed changes has drawn concern from across the financial services sector. Michael Summersgill, Chief Executive of investment platform AJ Bell, sent a letter to the Chancellor this week criticising the proposals as “unwieldy” and lacking in evidence. According to his letter, the reforms represent a “significant backward step” for a product whose popularity rests in its “relative simplicity.”
Summersgill noted that cash routinely moves through stocks and shares ISAs, whether as contributions, dividends, or during asset rebalancing, and taxing that process would penalise typical investor behaviour. “The government intends to punish retail investors for using the Stocks and Shares ISA the way it was designed to be used by levying tax,” he wrote.
Industry Concerns Point to Potential Unintended Consequences
According to Summersgill, a survey conducted by AJ Bell suggests the majority of savers affected by the upcoming cash ISA limit cut would likely divert their funds to taxable accounts or NS&I bonds, rather than investing in stocks and shares. This, he argued, runs counter to the government’s stated objective of encouraging long-term investment.
He further warned that the reforms risk entrenching the divide between cash ISAs and stocks and shares ISAs, rather than bridging it. “As we warned Treasury officials on multiple occasions ahead of the Budget, this will harden the border… making it less likely existing excess funds held in Cash ISAs will shift to long-term investing,” Summersgill said.
His figures suggest that around 3 million people currently hold at least £20,000 in cash ISAs with no corresponding investment in stocks and shares ISAs, amounting to what he described as a £60 billion missed opportunity.
The proposed ban on transfers, combined with the potential interest cap, may further undermine savers’ flexibility and reduce the ISA system’s attractiveness. According to Summersgill, “choice and flexibility” are two of the product’s key advantages, both of which could be compromised.
