Experts criticise Treasury plans to tax interest on cash in stocks and shares ISAs
The government’s plans to impose a 22 per cent tax on cash interest held in stocks and shares ISAs have been criticized by asset managers, banks and consumer groups.
Ministers argue the changes are aimed at encouraging more people to shift money from cash into productive investments, supporting economic growth and boosting long-term returns.
But critics say the proposals risk undermining the simplicity that is one of the key appeals of the ISA system and could deter cautious savers from entering the market.
The Treasury says the new tax levy is to prevent people from breaking the rules by putting the full £20,000 into their ISA, keeping it as cash and earning interest; but some industry experts argue there is little evidence that people behave this way.
Some industry insiders have warned that the reforms could amount to a hidden tax on savers who use their cash holdings as part of a sensible investment strategy.
Yael Ossowski, deputy director of the Center for Consumer Choice, argued that the move fundamentally changes the purpose of ISAs as a tax-free savings vehicle.
He said ministers were effectively asking savers to pay tax on the safest assets held in an account specially designed to shield savings from the taxpayer, describing the measure as a “stealth tax on cautious savers” that could push risk-averse households into investments they might not otherwise choose.
The criticism was echoed by Ian Rand, chief executive of Monument Bank, who suggested policymakers had misunderstood how many people were investing.
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Rather than switching directly from cash to stocks, investors often hold cash temporarily and gradually build positions over time while they decide where to allocate the money. He argued that penalizing cash holdings during this period risked deterring rather than encouraging responsible investment.
“The government says it wants to encourage people to invest, but this accusation misconstrues how responsible investing works,” Mr Rand said, adding that cash accounts were an important part of the investment journey for both experienced and novice investors.
Concerns about complexity emerged as a common theme among advisors and investment firms.
Quilter tax and financial planning expert Rachael Griffin warned that taxing cash interest on Stocks and Shares ISAs, along with new rules governing money market funds and restrictions on transfers, “risks making the product feel more complicated at exactly the point where policymakers want cautious savers to take their first steps into investing”.
This view was shared by Claire Trott, head of advice at St James’s Place. “Holding cash is often a normal part of the investment journey,” he said. “Investors can hold cash temporarily while they decide where to invest, change investments, or wait for the money to be reinvested.”
Introducing additional tax considerations risks adding another layer of complexity to a product that has historically been valued for its simplicity.
Industry figures also questioned whether the reforms were targeting an actually existing problem.
InvestEngine head of investments Andrew Prosser said cash balances, money market funds and overnight exchange-traded funds were widely used by ordinary investors to manage risk or hold money between investment decisions rather than bypassing ISA rules.
“The problem is that these rules seem to assume that investors will actively seek to exceed cash ISA limits,” he said, arguing there was little evidence that most savers behave this way.
Operational concerns are also beginning to emerge.
“This new tax is not only a burden for investors, but also a headache for platforms,” said George Sweeney, investment expert at comparison site Finder. “It’s not yet entirely clear how the tax will be levied, whether ISA holders will need to start filing self-assessment tax returns going forward, or whether the platforms will look to create some form of withholding system. “The biggest advantage of ISAs is supposed to be their simplicity and lack of paperwork.
“And the irony is that all of this is happening under measures that the government hilariously calls ‘Simplification and modernization of the tax system’,” he added.
Other advisors pointed out the potential consequences for people saving toward specific financial goals.
Killik & Co. senior wealth planner Jennifer Crichton said: “The recommendations also overlook that holding cash temporarily can be a sensible part of financial planning, especially when investors are approaching major life events such as the purchase of a new property and want to reduce risk.”
Nouran Moustafa, an independent financial adviser at Roxton Wealth, added that another big concern “is the proposed ban on moving money from stocks and shares First Time Buyer ISA to cash close to purchase”.
“Buyers need to get rid of the risk as the foreign exchange approaches and not gamble with their deposits. Simpler is better. Simpler but not rigid,” he said.
Michelle Holgate, director and asset manager at RBC Brewin Dolphin, similarly warned that restrictions on transferring funds from Stocks and Shares ISAs to cash could limit the flexibility of savers as their circumstances change.
Taken together, reactions from across the industry suggest there is broad support for the government’s desire to encourage greater participation in investments, but deep doubts about whether taxing cash held in ISAs is the right way to achieve this.
The risk, critics say, is that a policy designed to modernize the ISA system will make it more complex, less flexible and ultimately less attractive to the very savers ministers hope to persuade.
As an HMT spokesperson said: “Parking cash in a non-cash ISA over the long term to earn tax-free interest is not investing. These changes will push more people towards investments that actually grow their money, and industry leaders including Nationwide and the Building Societies Association support us on this.
“Savers can still hold up to £12,000 in a Cash ISA, and those aged 65 and over can keep the full £20,000 allowance.”
When investing, your capital is at risk and you may get back less than you invested. Past performance does not guarantee future results.
