HM Revenue and Customs has announced a 22% tax on interest earned on cash held within stocks and shares Individual Savings Accounts (Isas), as part of a broader reform of the Isa regime. The Treasury also confirmed a new first-time buyer Isa with no upper age limit, reflecting the rising average age of first-time homebuyers.
New tax on cash in stocks and shares Isas
From April 2027, under-65s will be limited to £12,000 per year in cash Isas, down from the current overall Isa allowance of £20,000. To prevent savers from circumventing this cap by holding cash in stocks and shares Isas, HMRC will impose a 22% tax on all interest earned on cash held within those accounts. Additionally, investors will be restricted from holding 100% of their stocks and shares Isa in money market funds, which are low-risk investments offering returns similar to cash.
First-time buyer Isa details
The Treasury launched a consultation on a new first-time buyer Isa, which will be available to anyone aged 18 or over, unlike the Lifetime Isa (Lisa) which had an upper age limit of 40. The government bonus will remain at 25% of savings, but it will now be paid only when a property is purchased, rather than annually. The 25% penalty for withdrawing money for other reasons will be removed, addressing criticism that it eroded savers' original capital. The property price cap of £450,000, unchanged since the Lisa was introduced in 2017, is under review, though the Treasury noted that it “ensures that the support goes to people who need it most”.
Reactions to the reforms
Rachael Griffin, tax and financial planning expert at Quilter, said the proposed first-time buyer Isa “marks a clear step towards creating a savings product that better reflects the realities facing aspiring homeowners, but there are issues still to be ironed out”. She highlighted the £450,000 price cap, which has not been adjusted for inflation. Rachel Vahey, AJ Bell’s head of public policy, criticised the reforms, stating: “Rather than minimise friction between saving and investing, these reforms reduce flexibility, entrench the divide between cash and investment accounts and introduce tax charges and complex age-related allowances. Riddled with unintended consequences, the reforms do little to encourage new investors.” The Building Societies Association welcomed the rules on stocks and shares Isas.
