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Martin Lewis has warned about a new tax on ISAs that will soon be coming in. Chancellor Rachel Reeves announced in her Autumn Budget there will be key changes to the tax allowances on ISAs.
These savings accounts are entirely tax-free and you can currently pay in up to £20,000 a year, divided as you choose between cash ISAs or stocks and shares ISAs. But Labour has announced that from April 2027, only £12,000 of this allowance will be available to pay into either type of ISA.
The remaining £8,000 will have to be used for stocks and shares ISAs, in efforts to get savers into investing more. The new rules will only apply to savers under the age of 65, with older people keeping the current allowance.
But there wil be other changes coming in from April 2027, including a new tax on certain ISA savers. A Government document outlined that several rules will be brought in “to avoid circumvention of the lower limit for cash ISAs”.
One of these is “a charge on any interest paid on cash held in a stocks and shares or Innovative Finance ISA”. A innovative finance ISA is where you invest in peer-to-peer lending, which is where money is loaned to borrowers and businesses through an online portal. Mr Lewis spoke about the new HMRC levy on his BBC podcast.
New tax charge
He said: “The Government is trying to get people to hold money in shares more than in cash, so it has cut the cash ISA limit. It has done a couple of things, of which this is one, to effectively stop people from effectively using a shares ISA as a cash ISA.
“When you have an investment platform, you tend to do it by depositing cash in there and then investing that cash, so they have access to facilities that pay cash, and some of them pay interest. What some people do is they simply hold cash inside a shares ISA and its tax-free, like a cash ISA is.
“The Government has said to prevent that, they are going to add a tax charge onto cash held inside shares ISAs for under 65s, from 2027.” ISA savers may wonder if they will be liable for the new tax, and Mr Lewis warned the Government still has yet to confirm all the details.
He said: “It is unspecified how that tax charge will work. There are some dangers here, because if you want to take your money out of the market for a certain period to invest in something else, and you’re going to hold it for six weeks, it seems pretty unfair that you would have tax charge.
“If you are doing it to jemmy the system, and you’re effectively going to use your extra £8,000 allowance that you get on shares to hold cash in a shares ISA, that’s what the Government is trying to stop.
“My suspicion is there will be a consultation on exactly how they do it and how long you have to be holding cash for it to be taxed, and what the tax will be. But we’re not there yet, we just don’t know the rules for that yet.”
What other new restrictions are coming in on ISAs?
The Government is also bringing in other measures from April 2027 to stop savers holding cash savings in a stocks and shares ISA. These include banning transfers from stocks and shares and Innovative Finance ISAs to cash ISAs.
There will also be new “tests” to determine if an investment is eligible to be held in a stocks and shares ISA, to check it is not “cash like”.
