Savers could exploit a 1p strategy to sidestep restrictions on funds in ISAs. Beginning April 2027, the annual cash ISA limit for individuals under 65 will decrease from £20,000 to £12,000. Despite this reduction, the overall ISA allowance for under-65s will remain at £20,000, permitting a split of funds between cash and stocks and shares ISAs.
Alternatively, individuals can fully invest the £20,000 allowance into stocks and shares ISAs. This shift aims to drive more people towards investing and boost economic activity. Those aged over 65 will retain the ability to save up to £20,000 in a cash ISA.
Reports indicated that savers might face a 22% levy on interest accrued from cash holdings in stocks and shares ISAs from April 2027. However, recent updates from The Telegraph suggest this charge applies only if 100% of investable assets are in “cash-like” investments, such as money market funds.
The loophole entails investing £12,000 in a cash ISA, £7,999.99 in cash within a stocks and shares ISA, and the remaining 1p in the stock market.
Previously, HMRC hinted at a charge on interest for those holding cash in stocks and shares accounts from the specified date, without specifying the rate. A Treasury spokesperson emphasized the initiative to prompt more investments in stocks and shares, highlighting their historical outperformance compared to cash savings, while maintaining the £20,000 tax-free cap.
The Mirror reached out to the Treasury for further comments. Various ISAs, including cash, stocks and shares, Lifetime, and innovative finance ISAs, cater to different savings needs. Children also have Junior ISAs available. Some ISAs have lower annual limits, like the £4,000 cap for a Lifetime ISA per tax year.
Alongside the cash ISA adjustment, a hike in the tax rate on savings interest from April 2027 has been confirmed. Basic-rate taxpayers will see an increase from 20% to 22% on savings interest exceeding £1,000 annually. Higher-rate taxpayers will experience a rise from 40% to 42% on interest surpassing £500 per year, and additional-rate taxpayers will face a rate hike from 45% to 47% on all savings interest.
Tax is applicable on savings interest over specific thresholds, with ISAs offering protection up to the annual allowance.