Chancellor Rachel Reeves has announced a new tax measure targeting savers who hold cash within stocks and shares Individual Savings Accounts (ISAs), marking the first time such accounts will face a tax on interest. Beginning in April 2027, individuals with cash held in these accounts will be subject to a 22 percent tax charge on any interest earned, a significant departure from the long-standing tax-free status of ISAs.

The move comes as part of a broader tightening on ISA rules, which last November included a reduction in the annual cash ISA allowance from £20,000 to £12,000 for savers under 65, effective from the same date. While the £20,000 limit for investment ISAs remains unchanged, the Treasury’s new tax charge is intended to discourage savers from bypassing the cash ISA cap by placing excess funds into stocks and shares ISAs but leaving the money uninvested in cash or cash-like assets.

Under current regulations, interest earned on cash held within stocks and shares ISAs is tax-free, but the government’s forthcoming measure targets this loophole. Treasury officials argue the tax will prevent individuals from exploiting the difference between the new cash ISA limit and the broader investment ISA allowance. However, the financial sector has expressed strong concerns, describing the policy as a harsh and complicated development that undermines ISAs’ reputation as a tax-efficient savings vehicle.

Industry experts warn that the 22 percent tax on interest could deter savers from using ISAs as intended, creating confusion and potentially discouraging them from moving into investment products. Jason Hollands, managing director at BestInvest, likened the legislation to using “a sledgehammer to crack a walnut,” stressing that it damages the core tax advantages that have made ISAs popular. Similarly, Rachael Griffin of wealth manager Quilter highlighted the potential for the rule to complicate saving strategies, particularly at a time when policymakers are encouraging more cautious investors to begin investing.

Concerns also surround the treatment of “cash-like” investments, such as money market funds that invest in short-term government bonds. These funds provide relatively secure income streams, but it remains unclear whether they will fall under the new tax charge, as HM Revenue & Customs has yet to provide detailed guidance on this aspect.

Opposition politicians have criticized the tax changes, with Shadow Chancellor Sir Mel Stride calling the measures “a further tax raid on savers.” He criticized the combined effect of reduced ISA allowances and increased tax charges on savings interest, arguing the government is penalizing individuals who have followed the long-standing advice to work hard, save, and invest responsibly.

With this policy expected to be among the last undertaken by Reeves before the next Chancellor takes office, financial professionals are advising savers to carefully review their ISA holdings and strategies ahead of the April 2027 changes.