Returns on uninvested money held in shares and shares Isas may very well be charged 22% tax to shut potential loophole

HMRC could tax interest earned on cash held in stocks and shares Isas by 22 per cent under new plans.

The Government is understood to be considering a flat rate charge of 22 per cent on any interest earned on cash holdings in a stocks and shares Isa in a bid to prevent savers circumnavigating the new lower cash Isa limit, as reported by Politico.

This would bring charges on cash holdings in investment Isas in line with savings interest tax.

This is applied to interest over the Personal Savings Allowance (PSA) or £1,000 for basic-rate taxpayers and £500 for higher-rate taxpayers. 

It was announced the cash Isa allowance would be cut to £12,000 from its current level of £20,000 from 6 April 2027 for under-65s in the Autumn Budget. 

In the days following November’s Autumn Budget, HMRC said when the new rules kick in in April 2027, any cash held within a stocks and shares Isa would face a charge on any interest earned from 6 April 2027.   

HMRC is considering introducing a flat rate charge of 22 per cent on interest earned on cash held in stocks and shares Isas

Investment platforms allow investors to open stocks and shares Isas with cash that is waiting to be invested, or sell investments and hold money temporarily as cash in their account.

This opened up the possibility that cash savers with more than £12,000 to shelter, could have skirted around the cap by opening a stocks and shares Isa with the excess £8,000 and leave their money parked in cash.

But there are genuine reasons investors decide to hold cash in a stocks and shares Isa, for example to park money in cash for a period of time awaiting investment, or because they are nervous and want to move to cash to weather stock market storms. 

After the Budget, HMRC also said savers will be blocked from transferring stocks and shares to cash Isas from 6 April 2027, as part of Rachel Reeves’ Budget raid.

Under the current rules, it is possible to transfer a stocks and shares Isa into a cash Isa and vice versa.

If that remained the same, in theory savers could pay £12,000 into a cash Isa and up to £8,000 into a stocks and shares Isa on top, then transfer the latter into a cash Isa shortly after.

HMRC is also thought to be considering aligning charges on interest earned on cash held in stocks and shares Isas with income tax bands.

Andrew Gall, of the Building Societies Association, said: ‘We are working constructively with the Government to ensure that the policy is implemented in a way which works for consumers and helps to achieve the Chancellor’s aim to get more people to invest when it is right for them.’

Stephen McGee, chief executive of Scottish Friendly, which has supported the Government’s aim to encourage more people to invest, says: ‘While this proposal may not be popular with some savers who hold cash within their investment Isas, it should be seen as part of a broader effort to prompt greater engagement with long term investing.’

An HMRC spokesman says: ‘To encourage greater investment in stocks and shares, we’re developing changes to Isa rules which will prevent circumvention of the new lower cash Isa limit.

‘We’re already working closely with industry and will publish clear guidance before the changes come into effect.’