HMRC to block Cash ISA loophole as savers hit with ‘£162 bill’ | Personal Finance | Finance
HMRC is set to close a Cash ISA loophole that could leave some savers facing unexpected tax bills of up to £162 a year, after Labour unveiled new plans to tighten the rules around tax-free savings. The move is aimed at stopping individuals from sidestepping forthcoming limits on cash Isas by parking uninvested cash inside stocks and shares Isas, a practice ministers fear could undermine reforms announced in the Autumn Budget.
Under changes due to take effect from 2027, the annual cash ISA allowance for under-65s will be cut from £20,000 to £12,000. Currently, savers can still place up to £20,000 a year into ISAs across any mix of cash, stocks and shares, or innovative finance products, with no tax due on interest or investment returns.
However, the flexibility of the system has raised concerns within the Government that savers could simply move surplus cash into a stocks and shares ISA and leave it uninvested, effectively continuing to shelter the full £20,000 from tax.
HMRC has confirmed it will introduce new rules to prevent this. Under the proposals, interest earned on cash held within investment ISAs could be taxed at 20 per cent if it is deemed to be used to circumvent the lower cash ISA cap.
Based on current interest rates offered by platforms such as Trading 212, a saver holding £10,000 in uninvested ISA cash could face a tax charge of around £81, while someone holding £20,000 could see £162 deducted from their interest.
The measures would apply only to savers under the age of 65 and will not come into force until 2027, giving investors time to adjust.
Industry figures have warned the move could penalise ordinary investors who hold cash temporarily while deciding where to invest. Jason Hollands, managing director at investment platform Bestinvest, said the proposal risked damaging trust in the Isa system.
“This risks undermining the tax-free promise of ISAs,” he said. “Holding cash within an Isa is a normal and legitimate part of investment behaviour.”
Mr Hollands explained that investors often place money into an ISA to secure their annual allowance, before deciding how and when to invest it. Cash balances can also build up due to market volatility, dividend payments or delays between trades.
“It is perfectly reasonable for a genuine investor to have periods when they are holding cash,” he added, suggesting a three-month grace period could allow savers time to deploy funds without facing a tax penalty.
HMRC confirmed that regulations would be introduced to close the loophole. A spokesperson said: “Rules will be introduced to avoid circumvention of the lower limit for cash ISAs, including where interest is paid on cash held within an account.”
The spokesperson added that further details would be published ahead of implementation and confirmed the proposals would be subject to consultation with industry stakeholders.
Labour has yet to confirm whether any exemptions, grace periods or transitional arrangements will apply once the new rules are finalised.
