Rachel Reeves ISA Reforms Introduce 22% Tax on Cash Held in Stocks and Shares Accounts

The Treasury has announced that from April 2027, interest earned on cash held within stocks and shares ISAs will be subject to a 22% tax charge, alongside the introduction of a new first-time buyer ISA with no upper age limit. The policy aims to prevent savers from circumventing stricter cash ISA deposit limits while encouraging broader investment participation.

New Cash ISA Restrictions Drive Tax Change

Under reforms initiated by Chancellor Rachel Reeves, the annual deposit allowance for cash ISAs will fall to £12,000 for savers under 65 from April 2027, down from the current unlimited threshold within the overall £20,000 ISA annual allowance. The tax on cash interest in stocks and shares wrappers serves as a structural safeguard to prevent account holders from depositing the full £20,000 into stocks and shares ISAs and parking funds in cash positions or money market funds to avoid the lower cash ISA cap.

HM Revenue and Customs outlined additional restrictions to strengthen the policy. Investors will be prohibited from holding 100% of their stocks and shares ISA in money market funds, which function as low-risk cash-equivalent investments. The rules also prevent subscribers from holding cash long-term within stocks and shares wrappers or transferring funds between account types to exploit the differential limits.

First-Time Buyer ISA Replaces Lifetime Account

The government will launch a consultation on a new first-time buyer ISA to replace the Lifetime ISA, which the previous budget eliminated due to criticism over its 40-year upper age limit for new savers and 25% withdrawal penalty. The redesigned account will be available to anyone aged 18 or older, reflecting rising property purchase ages across the United Kingdom. The government will retain the 25% savings bonus but distribute it only upon property purchase rather than annually, and remove the penalty for withdrawals used for non-property purposes.

The Treasury consultation suggests maintaining the £450,000 property price cap, citing a recent report confirming the threshold "ensures that the support goes to people who need it most." Industry figures including the Building Societies Association have welcomed the clarity while urging sufficient transition time before the April 2027 implementation date. A technical consultation with industry on draft legislation will commence shortly, with regulations to be laid in autumn.