The UK Treasury has announced a new personal finance policy introducing a flat 22 percent tax charge on interest paid on uninvested cash held within stocks-and-shares and innovative finance Individual Savings Accounts (ISAs).
The measure takes effect on April 6, 2027.
According to data from the tax office and the Bank of England, the overhaul aims to encourage savers to invest in the UK economy rather than holding assets in cash.
Additional reforms on the same date will reduce the annual cash ISA allowance from £20,000 to £12,000 for savers under 65 and ban transfers from stocks-and-shares ISAs to cash ISAs.
Bank of England data showed British households deposited £3.1 billion into cash ISAs in May, following a £12 billion surge in April, as savers rushed to maximize tax-free accounts before the limits drop.
Sarah Coles, head of personal finance at AJ Bell, highlighted the immediate public response to the upcoming restrictions.
"The dash for cash ISAs in May, on the back of a £12bn boost in April, shows people are filling their boots while they can," said Coles.
She noted that while cash remains vital for short-term emergency funds, individuals with excess money should consider long-term equities despite potential volatility.
"For a policy that was intended to encourage people to move away from cash and towards investing, this is hardly the result the government would have been hoping for," Coles added.
Craig Rickman, personal finance editor at interactive investor, expressed skepticism about whether the tax penalty and reduced limits would motivate under-65 savers to enter the stock market.
"It seems unlikely that applying a tax charge and slashing the cash ISA limit will prove the silver bullet," said Rickman.
Rickman suggested savers might instead keep excess funds in standard taxable accounts rather than adjusting to retail investment portfolios.
"There is a real possibility that many under-65s will stick with what they know and put savings above the new £12,000 cash ISA allowance into taxable accounts rather than take the investing plunge," he said.
The Treasury's anti-circumvention factsheet confirmed that cash-like assets, such as diversified money market funds, will remain eligible for non-cash ISAs without incurring the 22 percent tax, provided they do not make up 100 percent of the individual's portfolio.
