Rachel Reeves is reportedly planning to introduce a new tax on interest earned from cash kept in stocks and shares ISAs. The ISA landscape is set for a significant overhaul in April 2027, with the cash ISA limit for individuals under 65 being reduced from £20,000 to £12,000 annually.

While the cash ISA limit is decreasing, the overall ISA allowance for under-65s will remain at £20,000. This means individuals could distribute their savings between a cash ISA and a stocks and shares ISA, or invest the full amount in stocks and shares. The purpose of this adjustment is to prompt more people to invest and boost economic growth, while individuals aged 65 and over can still save up to £20,000 in a cash ISA.

An article by the Telegraph this weekend revealed that a 22% tax will be imposed on interest earned from cash held in stocks and shares ISAs starting April 2027. HMRC had signaled earlier that there would be a charge on interest for those with cash in stocks and shares accounts from that date, without specifying the rate.

Rachel Vahey from investment platform AJ Bell emphasized the urgency of resolving this issue to meet the April 2027 deadline. The Treasury stated that the changes aim to encourage investment in stocks and shares, which historically offer better returns than cash savings, while retaining the £20,000 tax-free limit, benefiting most savers financially without necessitating a transfer of existing savings from their Cash ISA.

Different types of ISAs include cash ISAs, stocks and shares ISAs, Lifetime ISAs, and innovative finance ISAs, with children having Junior ISAs. Some ISAs have lower annual limits, such as the £4,000 limit for a Lifetime ISA each tax year.

In addition to the cash ISA adjustment, the tax rate on savings interest earned in other account types will rise from April 2027. The tax rates for basic-rate, higher-rate, and additional rate taxpayers on savings interest will increase by 2% each.

Tax is applicable on savings interest exceeding specific thresholds, with ISA holders only subject to tax above the annual allowance. This tax adjustment aims to optimize the benefits of investing in stocks and shares while ensuring fairness in the taxation of savings interest.