Savers could exploit a 1p strategy to sidestep new restrictions impacting money stashed in ISAs.
Starting April 2027, the annual cash ISA limit for individuals under 65 will decrease from £20,000 to £12,000. Despite this reduction, the total ISA allowance for this age group will remain at £20,000, enabling a split between £12,000 in a cash ISA and £8,000 in a stocks and shares ISA.
Alternatively, individuals could fully allocate the £20,000 allowance into stocks and shares ISAs. This move aims to boost investment activity and spur economic development. Those over 65 will retain the ability to deposit up to £20,000 in a cash ISA.
Reports indicated that a 22% levy would apply to interest earnings from cash held in stocks and shares ISAs starting in April 2027. However, according to a recent Telegraph update, this charge will only trigger if all investable assets are in “cash-like” investments, such as money market funds.
In theory, a saver could place £12,000 in a cash ISA, £7,999.99 in cash within a stocks and shares ISA, and invest the remaining 1p in the stock market.
Previously, HMRC warned of charges on interest for cash held in stocks and shares accounts but did not confirm the rate. A Treasury spokesperson emphasized the aim to nudge more individuals toward stocks and shares investments, highlighting historical outperformance compared to cash savings.
The Mirror reached out to the Treasury for further comments. Apart from cash ISAs, other ISA types include stocks and shares ISAs, Lifetime ISAs, and innovative finance ISAs, with Junior ISAs tailored for children.
Besides the cash ISA adjustment, it is confirmed that the tax rate on interest gained in various accounts will rise from April 2027. For basic-rate taxpayers, the tax on savings interest exceeding £1,000 annually will increase from 20% to 22%. Higher-rate taxpayers will see their tax on interest above £500 per year go up from 40% to 42%. Additionally, the tax rate for additional rate taxpayers on all savings interest will rise from 45% to 47%.
Savings interest above the thresholds incurs tax, with ISAs only subject to taxation above the annual allowance.