Savers will no longer be able to take advantage of ISAs to make tax-free income from investment from next year, the Treasury is expected to announce.
Starting next April, income from stocks and shares ISAs will be taxed at 22 per cent, according to The Daily Telegraph.
Why is the government doing this?
As part of a bid to boost domestic investment in the stock market, Rachel Reeves announced in last year’s Budget that the tax-free cash ISA limit was being cut from £20,000 a year to £12,000 for under 65s.
Savers were instead encouraged to invest the remaining £8,000 of their tax-free ISA limit in a stocks and shares accounts.
It was estimated that the crackdown on cash ISAs would bring in £100m for the Treasury.
It has emerged that this won’t be a tax-free transfer, though, with interest generated by this investment subject to the same 22 per cent tax rate as other savings from April 2027.
Consumer champion and founder of the advice website Money Saving Expert, Martin Lewis, has previously criticised the government’s ISA reform on social media, saying: “The thought behind cutting the cash ISA allowance is to encourage, especially younger people, to invest instead via stocks & shares ISAs (which in the long run is likely to be better for them and the economy).”
“I think it’s unlikely to work, if people want savings, they want savings’.” he said. “It’s also unfair to deny older people, who have to be more risk averse when trying to nudge younger people.”
What does this mean for savers?
This means the tax-free limit has effectively been cut to £12,000 in cash ISAs while interest generated in stocks and shares will also be taxed, as part of a wider crackdown on people using loopholes to avoid tax.
The rules in place from next April will be similar to those before the creation of ISAs in 2014, when all interest earned on stocks and shares was taxed at 20 per cent.
The new rates will increase the number of people paying interest on savings to 2.8 million from 2026-2027, it is predicted.
The Treasury will also ban people from moving money from stocks and shares ISAs into cash ISAs to circumvent the rules, it is understood.
When will the changes come into force?
Though the government indicated after the Budget that it would be tightening up on cash held in stocks and shares, the exact rate of tax was not confirmed.
The announcement is expected in the coming days, with the new rates coming into force in the next tax year from April 2027.
Rachel Vahey, of investment platform AJ Bell, said: “This really does need resolving if the Treasury wants to keep to the timeline of April 2027. It leaves us with very little time to make changes. At the moment, we’re looking at a very sharp implementation period and we really need some clarity from the Treasury as soon as we can get it.”
A Treasury spokesperson 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.”