Savers face £162 ISA penalty with HMRC to close ‘loophole’ | Personal Finance | Finance
Savers face missing out on hundreds of pounds in interest after HMRC closed a cash ISA loophole. After months of speculation about the cash ISA limit, Chancellor Rachel Reeves announced in the Budget that the annual adult cash ISA subscription limit will be reduced to £12,000 from April 2027.
The annual overall contribution limit into adult ISAs will remain at £20,000, potentially encouraging some savers who reach the £12,000 cash ISA limit to invest more in stocks and shares. The over-65s will retain the full £20,000 annual cash ISA allowance.
Experts pointed out savers could just open a stocks and shares ISA, deposit the extra £8,000 and leave it as cash rather than investing it in stocks and shares.
New rules will be introduced to stop people from getting around the new limit. These include charges on interest paid on cash held in stocks and shares ISAs, and tests to determine whether money is being held in “cash-like” accounts.
Guidance published on HMRC‘s website said rules will be introduced “to avoid circumvention of the lower limit for cash ISAs”. Cash held in a stocks and shares ISA was subject to a 20% charge until July 2014, according to The Sun.
Jason Hollands, managing director of online investment platform Bestinvest by Evelyn Partners, said levying a charge on cash held within stocks and shares ISAs is yet another stealth tax.
He said it will impact genuine investors who sometimes decide to park their money in cash for a period of time before investing or because they are nervous about the market environment.
What this means for cash held in a stocks and shares ISA that is not invested depends on the rates offered by providers.
Trading 212 offers 4.05% AER on cash held in its stocks and shares ISA. One thousand pounds held as cash in Trading 212’s stocks and shares ISA would accrue £40.50 after a year.
If a 20% charge was applied to that amount of interest, it would cut the return down to £32.40.
On £10,000, the charge would be £81 while £20,000 would see a £162 hit and £30,000 incur a £243 loss, based on Trading 212’s current rate.
Mr Hollands has also said the tests to determine whether eligible investments are cash-like “will throw doubt about access to money market funds within stocks and shares Isas and could even bring short-dated bonds into question”.
He went on to raise concerns that while the country will have to wait for more details about how exactly the rules will work, if fees end up being levied on stocks and shares ISA managers, based on their total client cash balances, this would require them to pass on the cost as an account fee.
HMRC’s guidance said industry will be consulted on draft legislation, which will be made by amendments to ISA regulations and laid before Parliament well ahead of April 2027.
A HMRC spokesman 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 detail of the changes to the rules will be publicised in advance of the change and following discussions with stakeholders.”
