The Government is reportedly planning on taxing uninvested cash inside investment ISAs.
Chancellor Rachel Reeves announced in her Autumn 2026 Budget that the cash ISA allowance would be cut to £12,000. While the full ISA allowance would remain at £20,000, this would in effect decrease the amount savers could hold purely in cash inside a tax wrapper.
However, with the availability of other ISA products, there are various loopholes which could be exploited if a saver was determined to get a ‘cash like’ return on their money.
For instance – so-called ‘money market funds’ (MMFs) are groupings of cash-like investment instruments such as short-term government bonds. Such funds produce cash-like returns for very little volatility or price risk (albeit more risk and volatility than pure cash savings).
Another loophole would be that many major investment platforms now offer interest on cash held inside a stocks and shares or investment ISA.
While the Government initially announced it would look to close such loopholes, reports now suggest that it would look to tax the interest earned on cash inside investment ISAs at 22% instead.
Investment platforms routinely offer top interest rates to savers to entice them to open investment ISAs (with the idea being that they can then be encouraged to also invest their money into equites, bonds or other productive assets instead). But if these reports are correct, this could bring such offerings to a halt as the tax charge would be prohibitively expensive (compared to complete tax-free investment returns).
Speaking to Politico, a Government spokesperson commented: “To encourage greater investment in stocks and shares, we’re developing changes to ISA rules which will prevent circumvention of the new lower cash ISA limit.
“We’re already working closely with industry and will publish clear guidance before the changes come into effect.”
ISA complexity
The new limits and proposed rules have been widely criticised by financial firms for imposing ever greater complexity on savers.
Savers can now pick from five different types of ISA, including cash; investment; lifetime; innovative finance and junior ISA for under 18s.
The Government has introduced new cash ISA limits to encourage more people to invest their money, but this aim has also been criticised as potentially ineffective.
Despite the changes to the rules, savers still have a lot of long-term options at their disposal to ensure their financial plans are given the greatest opportunity to succeed, including with valuable tax shelters such as pensions.
If you are considering your options in light of the cash ISA rule changes and what it means for your money, don’t hesitate to get in touch. A financial planner can ensure that each type of account is used to its greatest potential – ensuring the long-term success of your financial plans.