New charge to stop Isa savers bending bending the rules

The limit for non-cash Isas, covering stocks, shares and innovative finance Isas will remain at £20,000, as part of a bid to encourage an investment culture.

And HM Revenue and Customs has said a 22% levy is set to be introduced on interest earned from cash held in stocks and shares Isas

Rules will be introduced to prevent people subscribing up to £20,000 cash in a non-cash Isa and leaving it there long-term, earning tax-free interest.

The rules also aim to stop people subscribing £20,000 to a non-cash Isa and then transferring those funds to a cash Isa, or subscribing £20,000 to a non-cash Isa and using the funds to purchase “wholly cash-like” investments.

Among the changes, there will be a flat rate charge (22%) on interest or alternative finance return paid on cash held within a non-cash Isa, HMRC said.

HMRC said a technical consultation with industry on the draft legislation will start shortly and regulations will be laid in the autumn, with the new rules coming into force from April 6, 2027.

The change has been welcomed by some, saying it will ensure fairness while encouraging investment.

Tom Riley, Nationwide Building Society’s group director of retail products said: “Ensuring a level playing field between cash and non-cash Isas is vital to maintaining a strong savings market.

“We welcome the Government’s introduction of controls to support its ambition to get more people investing, while ensuring over-65s can rely on the full cash Isa allowance.”

Andrew Gall, head of savings at the Building Societies Association (BSA) said: “We welcome the Government providing greater clarity on its proposed Isa reforms.

“It is vital that savers have clear information and sufficient time to understand how the changes will affect them and the choices available to them from April 2027.

“Building societies also need certainty on the final rules so they can update systems and communicate with their members well ahead of implementation.”

There were concerns however that the new rules risk making the Isa system overly complex and could actually stop people from looking at using investments to boost their savings.

Jasvinder Gakhal, chief executive, money at Skipton Building Society said: “This consultation is a step in the right direction,” adding “but the detail now matters”.

Jeremy Cox, head of strategy at Coventry Building Society, said: “We’re moving away from a fair and straightforward Isa system, where all adults can save or invest up to £20,000 tax-free each year, towards a more complex and confusing set of rules that will feel unfair to many consumers.”

Andrew Prosser, head of Investments at InvestEngine, said: “Our worry is that instead of encouraging investing, this could end up putting people off.

“If stocks and shares Isas become more complex and less straightforward, some savers may just disengage altogether – which would go against the whole point of trying to build a stronger investing culture in the first place.

“What we really need is to improve financial education and make it more accessible – that would do far more to encourage people to invest than simply restricting how they use their savings and would be a more effective way of building a healthier investment culture in the UK.”