Proposed Tax on Cash Held in Stocks and Shares ISAs

The UK government has announced plans to introduce a 22% tax on interest earned from cash held within stocks and shares ISAs, marking a significant shift in how these traditionally tax-free accounts operate. The measure is part of a broader package of ISA reforms expected to take effect from April 2027 and remains subject to consultation and final legislation. 

What the Tax Applies To

At its core, the policy targets uninvested cash balances inside investment ISAs. While stocks, funds, and other investments will continue to benefit from tax-free growth, any interest generated on cash sitting within the account will be taxed at a flat 22% rate. 

Reason for the Reform

The move is designed to close a perceived loophole in the ISA system. Currently, savers can deposit up to £20,000 into a stocks and shares ISA and hold that money in cash, effectively using the account as a tax-free savings vehicle rather than an investment wrapper. The new charge aims to prevent this by removing the tax advantage of holding cash in these accounts. 

Wider ISA Changes

The reform sits alongside a reduction in the annual cash ISA allowance for under-65s, which will fall from £20,000 to £12,000, while the overall ISA allowance remains unchanged. Together, these measures are intended to encourage greater participation in long-term investing, particularly in equities, and support broader economic growth. 

Industry Concerns

However, the proposals have attracted criticism from across the financial services industry. Commentators argue the changes could undermine the simplicity and appeal of ISAs, introduce additional administrative complexity, and potentially penalise cautious investors who hold cash temporarily as part of prudent portfolio management. 

Conclusion

In summary, the introduction of a 22% tax on cash within stocks and shares ISAs represents a fundamental rebalancing of the ISA regime, shifting it more decisively toward investment rather than cash saving, while raising questions about complexity, fairness, and unintended consequences for everyday savers.

If you have any questions, please do not hesitate to contact our tax team at tax@teamjs.co.uk.