Chancellor Rachel Reeves has confirmed a 22% tax charge on interest earned from cash held within stocks and shares ISAs from next year, alongside a reduced annual allowance for cash ISAs for those under 65. The changes have been met with warnings of 'unintended consequences' and increased complexity for savers and platforms alike.
Details of the New ISA Tax
Under the new rules, individuals under 65 will face a reduced annual allowance of just £12,000 for cash ISA contributions, down from the current £20,000 limit. Additionally, a 22% levy will be applied to interest earned on cash holdings within stocks and shares ISAs, effectively removing the tax-free status of such cash.
The announcement comes as Reeves faces speculation about her future as Chancellor, with Labour leader Andy Burnham widely expected to take over as Prime Minister and replace her at No. 11 Downing Street.
Expert Warnings on Complexity
George Sweeney DipFA, investing expert at comparison site Finder, criticised the move, saying: 'Once again the structure of ISA accounts is being meddled with, and the new tax on interest on cash (in what's supposed to be a tax-free stocks and shares ISA account) is just another notch on an increasingly more complex ISA ecosystem.'
Sweeney highlighted practical challenges: 'With many investing platforms, it's almost unavoidable to not hold at least some cash in the stocks and shares ISA wrapper because they don't offer fractional shares. Not only is this new tax a burden for investors, it's a complete headache for platforms too. It's unclear exactly yet how the tax will be taken, whether ISA holders are going to have to start filing self-assessment tax returns going forward or if platforms will attempt to build some sort of withholding system. A big selling point of ISAs was supposed to be the simplicity and lack of paperwork.'
Criticism from Industry Experts
Rachel Vahey, AJ Bell's head of public policy, also voiced strong opposition. She said: 'Rather than minimise friction between saving and investing, these reforms reduce flexibility, entrench the divide between cash and investment accounts and introduce tax charges and complex age-related allowances.'
Vahey added that the measures were 'riddled with unintended consequences' and would do little to attract new investors, predicting many would simply stick with cash instead of moving into investments.
Government's 'Simplifying' Claim Questioned
The irony of the situation was not lost on commentators, as the government has branded the measures under the banner 'Simplifying and modernising the tax system'. Critics argue that the new rules achieve the opposite, adding layers of complexity for both savers and financial platforms.
The changes are expected to take effect from the next tax year, with further details on implementation yet to be announced. Savers and platforms alike are awaiting clarity on how the tax will be collected and whether self-assessment will become necessary for ISA holders.
