Chancellor Rachel Reeves' new 22 per cent tax on cash interest held within Stocks & Shares ISAs has prompted a financial expert to reveal a perfectly legal way to circumvent the charge. The strategy involves using money market funds and a small allocation to equities, according to Andreea Ion, a former finance professional who now shares advice on social media and her podcast.
New Tax and Cash ISA Cap
In last year's Budget, Reeves announced that the Cash ISA allowance would be reduced from £20,000 to £12,000 annually for those under 65, aiming to encourage more Britons to invest. However, concerns emerged that savers would simply use the £20,000 allowance of the Stocks & Shares ISA without actually investing, leaving the funds as cash.
Following weeks of speculation, HMRC confirmed on Tuesday (June 23) that a 22 per cent 'charge' will apply to interest earned on cash held in non-Cash ISAs, including the Stocks & Shares ISA. The guidance also stipulates: 'Non Cash ISA portfolios made up of 100% cash-like assets will be non-qualifying investments'.
How the Loophole Works
Andreea Ion highlighted the importance of this single sentence, explaining how it offers a possible way around the charge. She said: "HMRC is set to charge a 22% tax on interest from cash inside a stocks and shares ISA. And I know that sounds confusing, so here's how this happened and how you might avoid it in 60 seconds."
"Rachel Reeves cut the Cash ISA allowance from £20,000 to £12,000 for under-65s. She said it's to get more Brits to invest instead. But people quickly spotted a loophole. They could put the extra money into a Stocks and Shares ISA and just leave it as cash, because most investment providers still pay interest on uninvested cash."
"So the government is trying to close that loophole by taxing that interest at 22 per cent. But, there's another loophole. There are super low-risk investments called money market funds that give similar returns to cash. So instead of keeping your money as cash, you could put it in one of those instead."
Complying with HMRC Rules
Ion added: "Now, HMRC has also said that you can't have 100% of your money in money market funds. That means that people could put most of their money in a money market fund, and a tiny amount in something like a global ETF or a stock. And that would comply with the rules as it stands."
She cautioned: "I don't necessarily think that you should do that because investing is still a great way to build wealth over the long run. But, I also don't like what HMRC are doing. So yeah, take that as you will."
New First-Time Buyer Account
The announcement also included a pledge to introduce a new first-time buyer account with no upper age limit, set to replace the Lifetime ISA. This move aims to support younger savers entering the property market, though details on the new account's terms have yet to be released.
