What we do and don’t know about Cash ISA changes

The Chancellor has announced a cut to the Cash ISA allowance from April 2027 for under 65s, in a move she hopes will nudge more people to take their first steps into investing. But extra rules and complexity could mean savers just park cash in non-ISA accounts, just as the rates of income tax on savings interest are due to rise by two percentage points.

While we wait for further details, it’s a good time to run through what we know so far. 

What we do know

• The overall ISA allowance will be frozen at £20,000 per tax year until 2030 and can still be split across different types of ISA.
• From April 2027, people under 65 will only be able to pay in up to £12,000 of their overall allowance into Cash ISAs.
• Those aged 65 and over can continue to subscribe the full £20,000 annual allowance to Cash ISAs if they want to.

HMRC has said it will also introduce rules to prevent investors under 65 from using other types of ISAs to get around the lower cash limit.  

It plans to:

• Prevent transfers into Cash ISAs from other types of ISA.
• Levy a charge on interest paid on cash held in investment ISAs.
• Test whether an investment can be held in a Stocks and shares ISA, or if it is ‘cash-like’.

It’s important not to make any big decisions before we’ve got detail about the new rules. Here are the key questions for savers right now.

What does HMRC mean by ‘cash-like’ investments?

The popularity of cash alternatives, such as money market funds, T-bills and bonds, has increased in recent years as investors look for other ways to generate income. Many of these cash alternatives are currently listed as permitted investment for Stocks and shares ISAs and are investments that carry some degree of capital risk, which makes them different to bank and building society cash deposits.

We’ll be watching closely to see what the ‘cash-like’ test will involve, and how it will apply to investors under 65.

Will I pay tax on my Stocks and shares ISA cash?  

Along with the tax savings, another big ISA perk is that you don’t need to declare any income or capital gains generated by your ISA investments on any tax return. And while HMRC has proposed new rules to charge interest paid on cash held in Stocks and shares ISAs, it didn’t use the ‘tax’ in its announcement. We don’t know whether its choice of wording was intentional yet, and whether any new charge would simply be income tax or a different type of charge. Another interesting point is that before changes to simplify ISAs in 2014, cash awaiting investment could be held in a Stocks and shares ISA without a tax charge, and it was up to the ISA manager to assess this.

Investors need clarity, as many keep cash in their ISA while they are deciding what to invest in after mopping up unused allowance. Many also have a cash balance to pay ongoing charges, or because they’ve recently received dividend payments or paid in a regular amount by direct debit.

How can I make sure my ISA cash is invested?

If you pay into your ISA on a regular basis, you can use our regular investment service to get the cash invested automatically each month. If you’re not withdrawing dividends you receive from investments held in your ISA, you can ask us to automatically reinvest them for you. These will be used to buy more shares in the company that paid them, rather than kept in cash within the ISA. Not only does this reduce your ISA cash balance but it tops up your investments without using any more of your ISA allowance for the year.

Can I pay charges outside of my ISA?

If you want to make sure your full ISA allowance is invested, you can ask us to deduct your account charges from a Dealing account instead. A Dealing account is an investment account that has no restrictions on what you can pay in and invest in. But it does not come with the same tax advantages as an ISA or a SIPP.

Paying charges from your Dealing account means all your ISA allowance can be invested and protected from tax, without your fees eating into that amount. If you don’t have a Dealing account, you can open one and have the cash for fees held in the account for no charge.

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