ISA reform means changes for savers

Cash ISA Limit Cut to £12,000 for Under-65s from April 2027

From 6 April 2027, anyone aged under 65 will only be able to save a maximum of £12,000 into cash individual savings accounts (ISAs) each tax year. The overall ISA limit will, however, remain at £20,000, with new rules introduced to minimise the opportunity for the lower cash ISA limit to be circumvented.

Aim of the new rules

The new rules are being introduced to prevent a saver from subscribing up to £20,000:

• In cash into a non-cash ISA and leaving the cash there long-term, earning tax-free interest.
• In a non-cash ISA and then transferring those funds to a cash ISA.
• To a non-cash ISA and then using the funds to purchase cash-like investments.

A non-cash ISA means a stocks and shares ISA or an innovative finance ISA.

What this means

There will be a 22% charge on any interest paid on cash held within a non-cash ISA. This rate applies even if a saver is a higher or additional rate taxpayer. The personal savings allowance cannot be used to mitigate the charge.

The transfer restriction means surplus cash cannot be moved to a cash ISA to escape the 22% charge. To avoid the charge, cash will have to be invested or withdrawn from the ISA.

A non-cash ISA portfolio made up of 100% cash-like investments will not be permitted:

• Only money market funds (these are low risk, investing in highly liquid, short-term debt securities) will be treated as a cash-like investment.
• The existing ISA investment rules are unchanged, so investments such as short-dated UK gilts will not be treated as cash-like investments.

The 100% requirement does appear to present an easy loophole, since holding just a penny’s worth of shares should circumvent the restriction.

65 and over

Savers aged 65 and over will continue to benefit from the current cash ISA limit of £20,000. Entitlement will apply from the start of the tax year in which a saver reaches 65.

From that point, the transfer restriction will no longer apply. The charge on interest earned on cash held in a non-cash ISA and the prohibition on 100% cash-like investments will, however, remain in place.

The government’s factsheet on the ISA anti-circumvention rules is available here.

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