Reeves’ last hurrah? ISA confusion

The ISA has been tinkered with previously, but in the last week it’s moved from tinkering to sledgehammering.

The main benefit of ISAs is that growth and income are tax free. Your savings are protected from HMRC.

From April 2027, that’s changing. It will only have a small impact on returns for savers and investors but it may damage confidence in a savings wrapper that still has huge benefits.

| ISAs explained

ISA stands for Individual Savings Account (that’s why you can’t have a joint one).

As an adult and a UK tax resident, you can open any of four types of ISA: Cash ISA, Stocks and Shares (S&S) ISA, Lifetime ISA (LISA), and the Innovative Finance ISA.

In all ISAs, income and growth is tax free. The maximum you can contribute across all ISAs is £20,000 in each tax year. The ISA allowance hasn’t changed since 2017.

There is no maximum amount you can have in an ISA. One wealth manager has estimated there are over 17,000 ISA millionaires.

| Changes are coming...

There are changes planned to all of the ISA types

Reduction in Cash ISA allowance

The Cash ISA allowance will reduce from £20,000 to £12,000 for under 65s from April 2027.

This aims to limit the amount younger people put into cash savings and encourage them to invest. I’m doubtful it will actually achieve this, but that’s the idea.

Tax paid in ISAs

For the first time, tax could be paid on income (interest) generated in an ISA.

To discourage you from holding cash in a Stocks and Shares ISA or an Innovative Finance ISA, there will be new (snappily named) ‘anti circumvention‘ rules.

Interest on cash held in a Stocks and Shares ISA or an Innovative Finance ISA will be taxed at a flat rate of 22%.

Crucially, if you hold cash in a Cash ISA, no tax will be payable.

From April 2027, the proposals state you will not be able to transfer a Stocks and Shares ISA to a Cash ISA (as you can now) if you’re under 65.

Out with the LISA, in with the new First Time Buyer ISA

UK leaders have noticed the LISA is confusing – it only took the government 9 years. The product can work for house buying and retirement, plus the withdrawal penalty (25%) means you can actually get back less than you put in.

They’re consulting on a new ISA focused only on helping first time buyers. A bonus would be added at the point of purchase. There will be no age limit on opening the ISA (currently 18-40 for the LISA). Early speculation suggests the house buying budget won't be increased above the £450,000 maximum which has been fixed since it was first introduced in 2017.

Changes are expected on this one from April 2028.

| What should you do with your ISAs now?

The biggest change you should plan for is how you manage your cash savings.

1. Get your emergency fund into a Cash ISA asap

For higher and additional rate taxpayers, in most instances holding your emergency fund in a Cash ISA makes sense. Higher rate taxpayers only receive £500 interest tax free (40% above) and additonal rate taxpayers have 45% tax on all interest on cash outside an ISA.

The reduction to the Cash ISA allowance means that if you need £30,000+ as an emergency cash fund, from April 2027 you’d need 3+ tax years to get to this level.

That’s why now might be a good time to get your cash savings in an ISA. You’ve got a £20,000 allowance this tax year and you can transfer part of a Stocks and Shares ISAs to a Cash ISA if you need a further top up.

2. Invest your cash in a Stocks and Shares ISA

Money in your Stocks and Shares ISA should be targeting long term (5-10+ years) investment returns. Don’t let cash sit there doing nothing or it will be taxed (and probably not earning much interest).

One thing I often hear when speaking to city professionals is a 100% allocation to equities in their S&S ISAs (S&P 500, Global equity trackers, shares etc.). In spite of the recent good years, you should note the fluctuations of holding equities can be large – up and down .

It’s important to have a solid cash buffer and perhaps a defensive allocation in your S&S ISA.

3. Stick with the program

It’s not time to throw your toys out the pram. It gets really annoying when governments change things continuously and you’re allowed to have moments where you lose confidence.

However, continue to trust the process and maintain contributions. ISAs remain one of the best ways to save tax and grow your wealth over the long term. It’s a speed bump not a roadblock.

Take time to understand your options and move forward.

| Time for advice?

Managing your money takes time and effort. The more you earn and own, the more complex it gets.

If you’re feeling like it’s time for a financial health check, book a call and we can get started on building you a plan for your money to maximise it and avoid nasty tax pitfalls.

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Risk warnings

Investments do not give the same capital security as cash deposits. Investments carry risks. The value of your investment (and any income from them) can go down as well as up and you may not get back the full amount you invested. Tax rates may change in the future.

The above article is not financial advice. If you need financial advice, please see an independent financial adviser (like us!).