State pensioners are in the firing line under Rachel Reeves's 22 per cent tax on ISA cash interest, it has been warned. Labour Party Chancellor Rachel Reeves is reportedly planning to introduce a 22 per cent tax on interest earned from cash held within stocks and shares ISAs from April 2027.
Proposed Levy Details
The proposed levy would match the basic rate of tax on savings income due to apply in the 2027/28 tax year. The reforms are also expected to reduce the annual cash ISA allowance for people under 65 from £20,000 to £12,000 from next April. The overall ISA allowance would remain unchanged at £20,000, meaning savers could still invest the remaining £8,000 through a stocks and shares ISA. People aged 65 and over would continue to benefit from the full £20,000 cash ISA allowance.
Expert Reactions
Tom Minnikin, partner at DJH Group's tax firm Forbes Dawson, questioned: "It seems unfair to tax individuals who hold cash temporarily, such as when switching between investments." "Similarly, older generations may be advised to hold more in cash as they approach retirement to smooth out investment fluctuations. They may feel hard done to by these changes," Mr Minnikin added.
While acknowledging that taxing cash in stocks and shares ISAs "arguably aligns the tax benefits of these types of account with the underlying policy intention, i.e. to promote investment," Mr Minnikin warned: "The beauty of the original ISA regime was its simplicity. The introduction of further rules could put off some investors, particularly those without financial advisers."
Rob Morgan, chief investment analyst at Charles Stanley Direct, expressed similar reservations about the direction of travel, saying: "The suite of 'anti-circumvention' measures risks reversing much of the simplification of ISAs achieved in 2014, replacing it with a more restrictive and complex landscape."
One industry source warned: "This would add even more complexity and would fail to help investors or the aim of these reforms."
Andrew Prosser, Head of Investments at InvestEngine, said: "Reports that investors may be able to sidestep the proposed reforms with a token stock holding highlight just how difficult these rules could be to design and implement cleanly in practice."
Government Response
A Treasury spokesman said: "We are reforming the cash ISA to encourage more people to invest in stocks and shares - which have historically performed better than cash savings - and we have retained the generous £20,000 tax-free limit." The spokesman added: "These changes will make people better off and will not require anyone to move existing savings from their cash ISA."
