Chancellor Rachel Reeves is facing backlash over plans to impose a 22% tax on cash held in stocks and shares ISAs, a move critics say will "punish" savers. The tax raid targets interest earned on cash within these accounts, with an example showing a £66 tax bill on £300 of interest.
Details of the Tax Change
Under the proposed reforms, if a saver has £10,000 invested in funds and sells all holdings, the money sits in their stocks and shares ISA account. If the provider pays 3% interest, the saver earns £300 in interest over a year. The 22% tax charge applies to that interest, resulting in a £66 tax bill.
Additionally, Reeves plans to slash the tax-free allowance for cash ISAs from £20,000 to £12,000 for those under 65. Labour's Treasury select committee chair, Dame Meg Hillier, expressed alarm, stating: "I'm concerned this is breaking the Isa brand. Before, it was very easy for people to understand that when you put money in, there's no tax inside the wrapper." She added that the reforms are "weakening that wrapper and it creates complexity."
Expert Criticism
Tom Selby, director of public policy at AJ Bell, described the reforms as "a dog's breakfast," agreeing with Hillier that they "layer on unnecessary complexity when investors are crying out for simplicity." He accused ministers of choosing to "punish those who don't use Isas in the way it wants" and urged any future administration to reverse the "needless and poorly designed changes."
Rachael Griffin, wealth manager at Quilter, noted: "There is no doubt that the UK has a deep-rooted love affair with cash that needs addressing. However, some of the Isa changes risk throwing the baby out with the bathwater." She welcomed the government's more proportionate approach to cash-like holdings but warned that the 22% charge "adds complexity at precisely the wrong time." Griffin added: "Applying a flat-rate charge regardless of an individual's tax position effectively reduces returns in a way that may be difficult for consumers to understand... The simplicity of the Isa has always been its tax-free status, and introducing a charge on cash interest risks undermining that clarity."
Impact on Savers
The changes could deter engagement with ISAs, as consumers may no longer clearly understand the benefits. Critics fear the reforms could lead to a drop in savings and investment, undermining the government's goal of encouraging long-term investing. The 22% tax charge applies regardless of the saver's tax bracket, making it a flat-rate levy that reduces returns across the board.
