Starting from 6 April 2027, individuals under the age of 65 will be limited to saving a maximum of £12,000 in cash individual savings accounts (ISAs) each tax year. However, the overall ISA limit will remain at £20,000, with new regulations implemented to reduce the chances of bypassing the lower cash ISA limit.
Objective of the new regulations
The new regulations aim to prevent a saver from contributing up to £20,000:
- In cash to a non-cash ISA and keeping the cash there for an extended period, earning tax-free interest.
- In a non-cash ISA and subsequently transferring those funds to a cash ISA.
- To a non-cash ISA and then utilizing the funds to acquire cash-like investments.
A non-cash ISA refers to either a stocks and shares ISA or an innovative finance ISA.
Implications of these changes
There will be a 22% tax on any interest accrued on cash held within a non-cash ISA. This rate is applicable regardless of whether the saver is a higher or additional rate taxpayer. The personal savings allowance cannot be utilized to offset this charge.
The transfer restriction means that excess cash cannot be shifted to a cash ISA to avoid the 22% tax. To evade this charge, cash must either be invested or withdrawn from the ISA.
A non-cash ISA portfolio consisting entirely of cash-like investments will not be allowed:
Only money market funds (which are low-risk investments in highly liquid, short-term debt securities) will qualify as cash-like investments.
- The current ISA investment regulations remain unchanged, meaning that investments like short-dated UK gilts will not be classified as cash-like investments.
- The 100% requirement does seem to create a potential loophole, as holding even a minimal amount of shares could bypass the restriction.
For those aged 65 and older
Savers aged 65 and above will continue to enjoy the existing cash ISA limit of £20,000. This entitlement will take effect from the beginning of the tax year in which the saver turns 65.
From that point, the transfer restriction will no longer apply. The charge on interest earned on cash held in a non-cash ISA and the prohibition on 100% cash-like investments will, however, remain in place.
The government’s factsheet on the ISA anti-circumvention rules is available here.