Savers may find a loophole using a 1p strategy to avoid the upcoming restrictions on cash in ISAs. The annual cash ISA limit for those under 65 will be reduced from £20,000 to £12,000 starting in April 2027. However, the total ISA allowance for under-65s will remain at £20,000, allowing individuals to split their savings between cash ISAs and stocks and shares ISAs.
Alternatively, savers can invest the full £20,000 allowance into stocks and shares ISAs to promote investment and boost economic growth. Individuals over 65 will still be able to deposit up to £20,000 into a cash ISA.
Reports indicate that a 22% charge will apply to interest earned from cash in stocks and shares ISAs from April 2027. However, a recent update from the Telegraph suggests that this charge will only be enforced if all investable assets are in “cash-like” investments, including money market funds.
In theory, someone could allocate £12,000 to a cash ISA, then distribute £7,999.99 in cash to a stocks and shares ISA, and the remaining 1p in the stock market.
HMRC previously mentioned a charge on interest for those holding cash in stocks and shares accounts without confirming the rate. The Treasury aims to encourage more investment in stocks and shares by reforming cash ISAs, emphasizing the historical outperformance of stocks and shares compared to cash savings. The generous £20,000 tax-free limit will be maintained, benefiting savers without necessitating the transfer of existing savings from Cash ISAs.
Different types of ISAs include cash ISAs, stocks and shares ISAs, Lifetime ISAs, and innovative finance ISAs, with children having Junior ISAs. Some ISAs have lower annual limits, such as £4,000 for a Lifetime ISA each tax year.
Besides the reduction in the cash ISA rate, there will be an increase in the tax rate on savings interest earned in other account types from April 2027. The tax rate for basic-rate taxpayers earning over £1,000 in savings interest annually will rise from 20% to 22%. Higher-rate taxpayers exceeding £500 in savings interest will see their tax increase from 40% to 42%, while additional rate taxpayers paying 45% will face a new rate of 47%.
Tax is applicable on savings interest above these thresholds, with ISA holders only paying tax exceeding the annual allowance.