Chancellor Rachel Reeves Unveils Major ISA Reforms with New Tax and Allowance Cuts
In a significant move that could affect millions of UK savers, Chancellor Rachel Reeves has confirmed plans to introduce a 22% flat-rate charge on interest earned from cash holdings within stocks and shares Individual Savings Accounts (ISAs). This proposal forms part of a broader overhaul of the ISA regime aimed at encouraging greater investment in equities.
Reduction in Cash ISA Allowance from April 2027
Alongside the new tax measure, the Chancellor has announced that the tax-free allowance for cash ISAs will be reduced from £20,000 to £12,000, effective from April 2027. This change will specifically apply to savers under the age of 65, marking a substantial shift in the government's approach to personal savings incentives.
Reports indicate that the Treasury is actively exploring reforms to the stocks and shares ISA framework. According to information from Politico, HM Revenue and Customs (HMRC) is considering the implementation of a 22 percent levy on any interest generated by cash components held within investment ISAs.
Industry Response and Expert Analysis
Stephen McGee, the Chief Executive Officer at Scottish Friendly, commented on the proposed changes. "We welcome the Government's focus on encouraging more people to invest," he stated. "While this proposal may not be popular with some savers who hold cash within their investment ISAs, it should be seen as part of a broader effort to prompt greater engagement with long-term investing."
McGee highlighted a common issue among savers, noting that "too many savers remain heavily weighted towards cash by default, even within investment ISAs that are designed to support growth over time." He suggested that "reforms like this can act as a prompt for people to review how their money is held and whether investing could play a greater role in helping them meet their long-term goals."
Balancing Cash and Investment Strategies
The financial executive emphasised the continued importance of cash within a balanced portfolio. "Cash will always have an important part to play in a balanced financial picture, particularly for managing short-term needs, risk, and market volatility," McGee explained.
He stressed the necessity for careful implementation, adding: "That is why it is essential these changes are introduced with clear guidance, sensible carve-outs and enough time for savers to adapt, especially where cash is held temporarily as part of an investment strategy."
Looking at the potential positive outcomes, McGee concluded: "That being said, if handled well, these proposals could provide a useful nudge that helps to normalise investing, increase engagement with savings decisions, and support better outcomes for savers over the long term. For those reasons, the direction of travel should be welcomed."
Concerns Over Implementation and Unintended Consequences
However, concerns have been raised regarding the pace and planning of these reforms. A source familiar with government discussions told Sky News: "It became abundantly clear at the meeting today that significant reforms to ISAs are being made on the hoof with little understanding of how retail investors behave or the extent of potential unintended consequences."
Government Statement on ISA Rule Changes
In response to these developments, a Government spokesperson provided clarification on the policy direction. "To encourage greater investment in stocks and shares, we're developing changes to ISA rules which will prevent circumvention of the new lower cash ISA limit," the spokesperson stated.
The spokesperson also confirmed ongoing collaboration with the financial sector, noting: "We're already working closely with industry and will publish clear guidance before the changes come into effect." This assurance aims to address concerns about the transition period and provide savers with the necessary information to adjust their financial strategies accordingly.
