ISAs have long been seen as a straightforward, tax-free way to save and invest in the UK.
That long-standing assumption may start to shift under proposals announced by the Government, which could see interest earned on cash within certain ISAs becoming taxable.
Following announcements made at the Autumn Budget 2025, proposed changes to ISA rules for individuals under the age of 65 have already prompted strong reactions amongst savers.
While some welcome the push towards long-term investing, others are concerned about added complexity.
What could change from 2027?
From April 2027, the annual subscription limit for Cash ISAs is set to reduce from £20,000 to £12,000 for savers under 65.
At the same time, the overall ISA allowance will remain frozen at £20,000 until at least April 2031.
In practical terms, this means individuals will still be able to save up to £20,000 each year within ISAs, but the Government is clearly encouraging those under 65 to allocate a larger proportion of that allowance to stocks and shares rather than cash.
Why cash held in investment ISAs matters
To prevent people from simply holding large amounts of cash within stocks and shares or innovative finance ISAs as a workaround, HMRC has indicated that interest earned on cash held within these ISAs may become taxable.
This position was outlined in HMRC’s latest tax-free savings newsletter and is intended to close what HMRC views as a potential loophole between different ISA products.
As a result, industry commentators have suggested that some providers may no longer be able to describe these ISAs as fully tax-free if interest on cash balances becomes subject to tax.
There has also been concern following suggestions that the Treasury may consider a flat-rate charge on such interest, reportedly discussed at a rate of 22 per cent, although no final decision has been confirmed.
The Treasury is currently refining the detail behind these proposals and has been engaging with banks, building societies and investment firms as part of that process.
A wider public consultation on draft legislative changes, expected to be made through amendments to the ISA Regulations, is due to open before April 2027.
What this means for tax planning
ISAs are still expected to play a key role in personal tax planning. However, these proposed changes could affect how individuals structure their savings and investments, particularly where cash holdings are involved.
If you are concerned about how ISA reform may affect your financial position or future tax planning, it may be worth reviewing your options sooner rather than later and seeking professional advice.
