ISA Reforms – will my ISA be subject to tax?

In the 2025 Autumn Budget, the Government announced reforms to the ISA regime. The headline measure of these proposed reforms was to reduce the Cash ISA annual allowance to £12,000, while the limit for Stocks & Shares ISAs and Innovative Finance ISAs would remain at £20,000. For those aged 65 and over, the Cash ISA allowance would remain at £20,000.

The objectives of these reforms are to simultaneously encourage investment into the UK economy, (which would clearly be welcomed given our fairly plodding levels of growth in recent years), whilst encouraging higher levels of investment amongst UK consumers, often referred to as retail investors. Rather than people having too much of their wealth ‘sat in cash’, where it becomes subject to inflation risk, the hope is that a wider uptake of investing will enable more people to benefit from real growth over and above inflation. Out of the G7 nations, households in the UK have the lowest proportion of wealth held in equities, so there is clearly progress to be made in this regard.

There’s no doubt that achieving these objectives would have hugely positive impacts, and in that sense at least we can see what the Government is hoping to do. However, it would be fair to say that the proposed methods could be brought into question. The ‘carrot vs stick’ approach certainly springs to mind, and it seems to me there may be a little too much stick and not enough carrot …

It is fairly apparent to us, that education is a significant factor in the relative under-investment of UK retail investors, and wonder whether more focus in this area might bear more fruit than the rather blunt reforms that have been proposed.

Notwithstanding, the Government are currently pressing ahead with this and have recently released an ‘Anti-circumvention rules factsheet’. This is essentially a list of additional measures designed to close off potential loopholes that some retail investors may otherwise have sought to exploit. Primarily, they’re looking to stop people from using Stocks & Shares ISAs (therefore taking advantage of the higher annual allowance) to hold cash, or “cash-like” products.

To disincentivise this, it is likely that a 22% charge on interest paid on cash held in non-Cash ISAs will be introduced.

It’s easy to see why such a measure generates headlines. The concept of paying tax on funds held in a famously tax-free wrapper is of course perverse, and with a flat-rate tax charge of 22% (with no use of the Personal Savings Allowance), it’s no surprise that it’s causing some concern.

It is common practice for investment platform providers to retain a small cash balance within Stocks & Shares ISAs, even those that would otherwise have 100% of the portfolio invested in the stock market. This cash ‘buffer’ is widely used to extract platform fees, but the cash buffer also typically earns a small amount of interest (usually well below market-leading rates). It is important to note that it is only the earned interest on the cash buffer that would be subject to the 22% tax charge, were this to be brought in as proposed in April 2027.  Under the proposals, providers would automatically report and pay the charge to HMRC, so individuals would not be required to declare anything themselves.

Should this go ahead as proposed, it does not need to cause mass panic. There is some understandable concern of the potential for instances where people using cash (or cash-like products) to ‘ringfence’ a portion of their portfolio for income could be subject to higher tax charges as a result of having higher cash holdings. As a business we’ll be alert to the implications for these scenarios in particular.

In the main however, as long as the Stocks & Shares ISA is used in the typical fashion, the vast majority of retail investors wouldn’t actually notice the charge being implemented, particularly against the general fluctuations that are part and parcel of being invested in the stock markets.

In terms of next steps, the Government has confirmed a technical consultation with industry on the draft legislation. We will be sure to keep our fingers on the pulse with this as things progress. If you have any questions or concerns on any of this, please do not hesitate to get in touch.

References:

UK GDP Growth World Bank Data: https://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?locations=GB

Full Fact – UK GDP in the G7: https://fullfact.org/economy/gdp-growth-international-comparisons/

HMRC: ISA reform Anti-circumvention rules factsheet: https://www.gov.uk/government/publications/fiscal-events-2026-factsheets/isa-reform-2027-anti-circumvention-rules-factsheet

HMRC data on the amounts held in ISAs since 2008: https://www.gov.uk/government/statistics/annual-savings-statistics-2025/commentary-for-annual-savings-statistics-september-2025