Proposed ISA Changes – What Could They Mean for Me?

You may have seen recent headlines about proposed changes to ISAs and wondered what they could mean for you. In this article, we've summarised the proposals and explained how they might affect you moving forward.

As a reminder, there are two main types of ISA:

- Cash ISAs, where your money stays as cash and earns tax-free interest.

- Investment ISAs, where your money is invested with the aim of achieving long-term growth. Any interest, dividends and capital gains generated within the ISA are free from tax.

Currently, everyone can save up to £20,000 into ISAs each tax year. This allowance can be held entirely in a Cash ISA, entirely in an Investment ISA, or split between the two.

Following the recent Budget, the Government has proposed changes designed to encourage more people to invest rather than hold their savings in cash. From April 2027, those under the age of 65 would still have an overall ISA allowance of £20,000, but only £12,000 could be contributed to a Cash ISA. Any additional ISA savings would need to be invested through an Investment ISA.

Those aged 65 and over would continue to be able to save up to £20,000 each year into a Cash ISA, an Investment ISA, or any combination of the two.

More recently, HMRC have proposed a further change affecting cash held within an Investment ISA. Under these proposals, interest earned on cash held within an Investment ISA would be subject to a 22% tax charge, whereas interest earned within a Cash ISA would remain completely tax-free.

For many investors, this second proposal is unlikely to make a significant difference. However, it could affect those who intentionally hold cash within their investment portfolio. At Magenta, where clients are taking regular withdrawals from their Investment ISA to support their lifestyle, we typically hold around 18 months' worth of planned withdrawals in cash. This helps avoid the need to sell investments during periods of market volatility. If these proposals become law, the interest earned on this cash reserve could become taxable.

What does this mean for me?

If you are aged 65 or over, these proposed changes are unlikely to have a significant impact. You would still be able to save up to £20,000 into a Cash ISA each tax year. If you're taking regular withdrawals from an Investment ISA, we could move this cash into a Cash ISA, allowing any interest earned to remain tax-free.

If you are under 65, the proposals are likely to have a greater impact. Your annual Cash ISA allowance would reduce to £12,000, and any cash held within your Investment ISA to fund future withdrawals could become subject to the proposed 22% tax charge. HMRC has also confirmed that those under 65 would not be able to transfer cash from an Investment ISA into a Cash ISA.

For example, someone withdrawing £1,500 per month would typically hold around £27,000 in cash (equivalent to 18 months' withdrawals) in an Investment ISA. Based on current interest rates, this could result in around £178 of additional tax each year under the proposed rules.

What happens next?

These proposals are still under consultation, so the final rules may change before they become law.

We'll continue to monitor developments closely and keep you informed. If the changes are implemented, we'll contact any clients who may be affected to review their arrangements and ensure their ISA strategy remains as tax-efficient as possible.