UK ISA overhaul introduces first-ever tax on interest earnings

Chancellor Rachel Reeves has announced sweeping changes to the UK’s ISA system. The reforms will take effect from April 2027 and include a new tax on interest earned within ISAs for the first time. Savers under 65 will see their Cash ISA allowances cut as part of the overhaul. From April 2027, interest earned within ISAs will no longer be tax-free. A 22% charge will apply to interest from cash held in Stocks and Shares ISAs and other non-cash ISA products. Money Market Funds will be exempt from this charge, but investors cannot hold their entire Stocks and Shares ISA portfolio in such funds.

The annual Cash ISA allowance for under-65s will drop from £20,000 to £12,000. However, those aged 65 and over will retain the full £20,000 entitlement. Additionally, under-65s will no longer be able to transfer money from Stocks and Shares ISAs into Cash ISAs after the deadline.

The reforms follow Labour’s decision to reduce the Cash ISA allowance for younger savers. Chancellor Reeves has stated the changes aim to encourage investment in shares and other productive assets rather than cash holdings. The new rules mark a significant shift in how ISAs are taxed and structured. Savers under 65 will face lower allowances and restrictions on transfers between ISA types. The government expects the measures to steer more investments towards shares and productive assets.