NEW ISA rules introducing a new 22% charge on interest next year create a two-tier system and “penalise ordinary investors”, experts are warning.
The changes, due to come into force from April 2027, are intended to discourage people from effectively using Stocks & Shares ISAs as another home for cash rather than investing their money.
But advisers argue the measures risk catching people who keep relatively small cash balances in their investment accounts.
Cash can build up within a Stocks & Shares ISA while investors wait to reinvest dividends, put money into the market gradually or keep funds available to cover platform and advice fees.
Critics fear applying the charge without an exemption for small or temporary balances could encourage investors to move money simply to avoid the tax, potentially pushing some into investments they are not comfortable with.
Scott Gallacher, Director at Leicester-based Rowley Turton, questions whether the rules could have unintended consequences for DIY investors.
He added: “As things stand, this certainly appears to create a two-tier system. DIY investors, and even advised clients holding cash directly on platforms, could face the new 22% charge on interest, while cash held within certain managed solutions may apparently be treated differently. It does make me wonder who had the Government’s ear when these rules were being drawn up.
“There are clearly commercial interests that could benefit if direct investors and advised clients are disadvantaged compared with those using providers’ own managed solutions. If the aim is to stop people using an Investment ISA as a disguised Cash ISA, that is understandable. But genuine working cash held for fees, dividends or pending investment is very different. The rules should recognise that distinction rather than penalise ordinary investors.”
Two-tier system
Nouran Moustafa, Practice Principal & IFA at Roxton Wealth, said this charge is punishing prudence.
She added: “The Government is trying to stop people using Stocks & Shares ISAs as disguised cash accounts. Fair enough. But taxing every pound of interest on incidental cash at 22% risks solving the wrong problem. Investors hold cash for perfectly sensible reasons: fees, dividends awaiting reinvestment, phased investing or simply because markets are volatile and they do not want to rush a decision.
“The danger is that policy starts dictating portfolio behaviour. If two investors have economically similar exposure but one is penalised because cash sits directly in the ISA while another achieves it through a fund or managed structure, that is hard to defend. I would absolutely support a de minimis exemption. Encourage investing, yes. But do not punish prudence. Sometimes holding a little cash is not avoidance; it is good portfolio management.”
Harvey Dhillon, Founder & CEO at Zmartly, said DIY investors are in the government’s sights.
He added: “The charge would land on cash your provider holds on deposit in a Stocks & Shares ISA. Cash inside a fund escapes the charge, so yes, two similar investors could be taxed differently. HMRC’s June factsheet and the draft rules do not address managed portfolio services, so that half rests on what providers have told advisers.
“DIY investors are clearly in scope, because a platform holds uninvested cash and cash for fees on deposit. The draft taxes the interest on that cash, and does nothing to stop a platform asking for it. It also blocks any refund, so a non-taxpayer would pay the savings basic rate, 22% in the first year, on interest that costs them nothing outside an ISA.
“That could push savers towards money market funds, and the draft caps that by saying they cannot be everything you hold apart from cash. Small and incidental balances get no exemption, and they deserve one: cash held to pay fees is not an investment choice.”
Adapt
Rob Mansfield, Independent Financial Advisor at Tonbridge-based Rootes Wealth Management, said investing is better than hoarding cash.
He added: “It’s noble for the government to champion investment over cash. For long-term savings, people should be investing rather than hoarding cash but this is poor legislation that resembles a sledgehammer cracking a walnut. It risks creating complexity and numerous loopholes.
“That’s before you consider the conflict with the Financial Conduct Authority who are putting pressure on platforms to pass on cash interest. For investment ISAs it may make things simpler to just not pay interest.”
Antonia Medlicott, Founder & MD at London-based Investing Insiders, said ordinary investors will become confused on what is being taxed.
She added: “There is a risk that overly prescriptive rules create an uneven playing field but investors shouldn’t assume that all cash held within a managed service will automatically be exempt. The more distinctions there are between different types of ISAs, cash, cash-like investments and managed portfolios, the harder it becomes for ordinary investors to understand what they are being taxed on.
“Platforms will need to adapt their systems to manage these balances, while investors should pay close attention to communications from their provider, as the administrative detail could be as important as the headline tax change. The biggest danger is that investors change sensible strategies simply to avoid a tax charge.
“The rules need to distinguish between someone deliberately holding a large cash balance and someone with a small amount of cash in their portfolio for practical reasons. Otherwise, they risk adding complexity and encouraging people to take investment risks they are not comfortable with.”
Samuel Mather-Holgate, Managing Director & IFA at Swindon-based Mather and Murray Financial, said it could move people into investing in the US rather than Britain.
He added: “By its nature this policy creates a two-tier ISA system. That is not an accident, it is the point. The Government wants to push savers out of cash and into investments, but there is a real risk the rules punish the wrong behaviour. A DIY investor holding cash briefly for fees, dividends or market timing could be hit, while similar cash exposure inside a fund or managed service may be treated differently.
“That is messy, unfair and hard to explain. Whether it will actually drive more investment into British businesses is another matter entirely. Much of the equity money leaving UK savers at the moment is still heading to the US, where returns and sentiment have been stronger. Nudging people away from cash does not automatically mean they will buy Britain.”
