The UK's tax authority is considering a radical cap on the interest savers can earn on cash held within certain Individual Savings Accounts (ISAs). This forms part of a sweeping set of anti-avoidance measures designed to stop people bypassing new, stricter limits on cash ISAs.
Details of the Proposed ISA Shake-Up
According to reports, HMRC has floated the idea of capping interest earned on cash held within stocks and shares ISAs. The aim is to ensure savers are incentivised to invest in assets like equities, rather than using the tax wrapper simply to hold large cash balances. The exact level of this proposed cap remains unclear.
These proposals are being drawn up by the Labour Party government to support its wider reforms. Key measures under consideration include:
- A ban on transferring funds from stocks and shares ISAs and Innovative Finance ISAs into cash ISAs.
- The introduction of tests to determine if an investment is eligible for a stocks and shares ISA or is too 'cash-like'.
- Applying charges on any interest paid on cash held within a stocks or shares ISA or an Innovative Finance ISA.
The government's goal is to encourage more long-term investment in the economy. However, the plans have sparked significant criticism from major players in the investment industry.
Industry Backlash and Warnings
Michael Summersgill, chief executive of investment platform AJ Bell, which administers over £100 billion in client assets, has written to the Chancellor to voice strong opposition. He argues the reforms are "unwieldy" and represent a "significant backward step" for a product celebrated for its simplicity.
"Rushing to implement these changes... without a proper consultation or any clear evidence they will incentivise long-term investing represents the worst kind of policymaking," Summersgill stated.
He challenged the core assumption behind the policy, noting there is no evidence that cutting cash ISA allowances will boost retail investment. An AJ Bell survey suggested most people would simply move their money into taxable cash accounts or products like NS&I bonds instead.
The £60 Billion 'Missed Opportunity'
Summersgill issued a stark warning about the potential consequences. He said the reforms will "harden the border" between cash and stocks and shares ISAs, making it less likely that existing funds will shift into long-term investments.
"Given there are 3 million people with at least £20,000 invested in Cash ISAs and nothing in Stocks and Shares ISAs, this represents a missed opportunity worth at least £60 billion," he warned.
He also predicted a short-term rush into cash ISAs before the new allowance reduction takes effect in April 2027 – the direct opposite of the government's intended outcome.
The proposed anti-avoidance rules came in for particular criticism. Summersgill argued that taxing cash temporarily held in investment ISAs – which occurs naturally when receiving dividends, paying fees, or making withdrawals – amounts to punishing investors for using the product as it was designed.
As the government finalises its plans, a major clash between policy intent and practical financial planning appears to be brewing, with millions of UK savers caught in the middle.
