ISA warning as Rachel Reeves plots huge 22% savings tax | Personal Finance | Finance

Brits could soon be hit by big changes to ISA rules as Rachel Reeves prepares a wide-ranging overhaul of how savings are taxed. The plans would affect both Cash ISAs and investment ISAs and could leave many people paying more to the Treasury from next year. The first change has already been confirmed. In the 2025 Budget, the Chancellor said the tax-free allowance for Cash ISAs will fall from £20,000 to £12,000 for under-65s from April 2027. 

That alone limits how much people can save each year without paying tax on the interest. But the Treasury is also looking at new measures that go further. Reports from Politico suggest HMRC is considering a 22% flat-rate charge on interest earned on cash held inside Stocks and Shares ISAs.

At the moment, interest inside an investment ISA is tax-free, even if the money is sitting as cash rather than being invested.

People can currently deposit up to £20,000 a year across their ISA products, including Cash ISAs, Stocks and Shares ISAs and up to £4,000 into a Lifetime ISA.

The potential new charge has raised concerns that savers will face extra costs if they hold cash for short periods while deciding how to invest.

Investment firms say the industry has not been given enough time to understand the proposals. Others warn that the changes risk putting savers off using ISAs altogether.

However, Stephen McGee, the CEO of Scottish Friendly, told GB News the plans should be seen in a wider context.

He said: “We welcome the Government’s focus on encouraging more people to invest. 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.

“Too many savers remain heavily weighted towards cash by default, even within investment ISAs that are designed to support growth over time.

“Reforms like this can act as a prompt for people to review how their money is held and whether investing could play a greater role in helping them meet their long-term goals.”

He added that the changes must be brought in carefully. He said: “Cash will always have an important part to play in a balanced financial picture, particularly for managing short-term needs, risk, and market volatility.

“That is why it is essential these changes are introduced with clear guidance, sensible carve-outs and enough time for savers to adapt, especially where cash is held temporarily as part of an investment strategy.

“That being said, if handled well, these proposals could provide a useful nudge that helps to normalise investing, increase engagement with savings decisions, and support better outcomes for savers over the long term. For those reasons, the direction of travel should be welcomed.”

Senior banking figures have also held talks with the Treasury and HMRC. But industry sources told Sky News there is growing frustration over how quickly the reforms are being developed.

One source who attended the meeting said: “It became abundantly clear at the meeting today that significant reforms to ISAs are being made on the hoof with little understanding of how retail investors behave or the extent of potential unintended consequences.”

The Government says the aim is to direct more savings towards UK companies while stopping savers from shifting money between ISA accounts to avoid new limits.

One idea being explored is whether people should be prevented from moving funds from stocks and shares ISAs back into cash ISAs.

A Government spokesperson said: “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.”