Savers could face a new 22% tax charge on interest earned from uninvested cash held within Stocks and Shares ISAs, according to recent reports. The potential shake-up, rumoured to take effect in April 2027, is part of a broader government push to encourage more Britons to invest their money in the UK economy rather than leaving it in cash savings. While the plans have not yet been officially confirmed, they follow significant changes to the ISA allowance announced by Chancellor Rachel Reeves in the recent Autumn Budget.
Why is a tax on Stocks and Shares ISA cash being proposed?
Currently, any cash you hold inside a Stocks and Shares ISA - whether it is waiting to be invested or simply being held back - earns interest completely tax-free. However, from 6th April 2027, the rules for savers aged under 65 are changing. While the overall annual ISA allowance will remain at £20,000, the amount that can be put into a traditional Cash ISA will be capped at £12,000 for those under the age of 65. To use the remaining £8,000 of their tax-free allowance, savers will need to utilise other products, such as a Stocks and Shares ISA.
The government is concerned that savers could simply deposit their remaining £8,000 allowance into a Stocks and Shares ISA and leave it as uninvested cash. This would effectively allow them to bypass the new £12,000 Cash ISA limit and continue earning tax-free interest. While some Stocks & Shares ISA providers don't pay any interest on cash, others offer interest rates as high as 3.8% AER. To close this potential gap, the Chancellor is reportedly looking to introduce a 22% tax on the interest generated by uninvested cash within an investment ISA.
How could the '1p loophole' bypass the reforms?
Despite the proposed tax, there are already suggestions that the rules could be circumvented. A recent report by The Telegraph highlighted a so-called "1p loophole" that could potentially undermine the Chancellor's ISA reforms. Although the final legislation has not been written, tax rules targeting 'uninvested cash' can often be sidestepped through careful account management. The loophole essentially revolves around ensuring that cash is technically classified as 'invested' rather than sitting idle.
This could potentially be achieved by:
- Using cash-equivalent funds - Savers could move their uninvested money into Money Market Funds or Overnight Rate ETFs. These products are technically classified as investments, but they are designed to be low-risk and to offer returns that closely track the Bank of England's base rate.
- Nominal investments - Depending on how the strict new rules are drafted, simply keeping a nominal amount, such as 1p, invested in a qualifying asset could alter how the investment platform or the tax office categorises the wider account balance.
By utilising cash-like investments, investors could theoretically continue to enjoy stable, interest-like returns on their money without triggering the proposed 22% tax charge on uninvested cash.
Further delays to ISA tax rules
As this story has developed, further information has emerged about the government's response to the loophole. The Telegraph has since reported that the Treasury has postponed publication of the rules governing how this new tax will work. Following the discovery of the '1p loophole', the proposed overhaul of the ISA system has been officially put on hold.
Because savers could theoretically protect their money from the 22% charge with ease, the government is now reviewing the finer details of the legislation, to ensure the tax can be implemented effectively without creating easily accessible workarounds.
What does this mean for your savings?
It is important to remember that the potential new tax charge is currently just a proposal. Furthermore, the new £12,000 Cash ISA limit for the under 65s does not come into force until April 2027. This means that for the current tax year, you can still put your full £20,000 allowance into a Cash ISA if you wish.
If you are already investing through a Stocks and Shares ISA, it is worth checking how much uninvested cash you currently hold in your account. While it is often sensible to keep a small cash buffer to pay platform fees or take advantage of buying opportunities, holding large sums of uninvested cash in the long term may become less tax-efficient in the future.
If you are unsure about the best way to manage your savings or investments, it may be beneficial to speak with an independent financial adviser. They can help you understand your options and build a strategy that suits your personal financial circumstances.
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