Important information - the value of investments and the income from them can go down as well as up, so you may get back less than you invest.
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Savers face some big changes next year. In a push to get Britain investing, the government will reduce the cash ISA allowance for most adults - and will tweak investment ISAs too.
The new rules will come into force on 6 April 2027 after a short technical consultation, which is due to be published this summer.
The headlines
- The cash ISA limit to fall to £12,000 for under-65s
- Interest on cash held in stocks and shares ISAs to be charged
- Lifetime ISAs are due to be phased out
How are cash ISAs changing?
A cash ISA is a savings account where any interest you earn is free from income tax. You can currently contribute up to £20,000 each tax year.
From 6 April 2027, however, the annual cash ISA allowance for people under 65 will fall to £12,000. The allowance for savers aged 65 and over will remain at £20,000, meaning they will not be affected by the reforms. During the tax year in which you turn 65, you will be entitled to the full £20,000 allowance.
The lower limit will apply only to new contributions. Any money already held in a cash ISA will still be sheltered from tax.
To prevent people getting around the new rules, under-65s will not be able to transfer money from a stocks and shares ISA - or an Innovative Finance ISA - into a cash ISA. However, it will still be possible to transfer money in the opposite direction.
The change is part of a wider package of measures aimed at encouraging retail investment. Other initiatives include a review of investment risk warnings, the introduction of targeted support and a public education campaign on the benefits of investing.
Are investment ISAs changing too?
While the cash ISA allowance is being cut for under-65s, the overall ISA allowance will remain at £20,000. This means anyone can keep adding up to £20,000 a year into their stocks and shares ISA.
However, the government is introducing some other changes.
Firstly, it will impose a 22% charge on any interest paid on uninvested cash within a stocks and shares ISA. The government wants to prevent people using an investment ISA to store lots of cash and leaving it there for long periods earning tax-free interest.
Rules around money market funds are also shifting. Last year, the government warned that these funds may be too ‘cash like’ to live in investment ISAs. It has now confirmed that investors can hold money market funds in investment ISAs and enjoy tax-free returns. However, money market funds cannot represent 100% of your portfolio. In this scenario, they will be classed as “non-qualifying investments”.
Money market funds - also known as cash funds - act a bit like variable-rate savings accounts. They are very low risk and aim to track UK interest rates. They do this by investing your money in things like government debt and bonds from reputable companies. Savers’ money is pooled with other investors and used to purchase these assets in the pursuit of growth.
- Read more: The basics of cash ISAs vs cash funds
Crucially, these investments are very high quality, liquid, and diversified. This means the funds themselves are low-risk and stable. However, they are still a type of investment, meaning you currently hold them within stocks and shares ISAs.
Have LISAs been scrapped?
The government is withdrawing Lifetime ISAs (LISAs) on the grounds that they are not working well for many people. It hopes to create a simpler ISA product that will help people achieve home ownership, and has embarked on a ‘First Time Buyer ISA’ consultation.
In the meantime, it is still possible to open a LISA and existing account holders can save into them “in line with the existing rules indefinitely”.
LISAs allow adults aged between 18 and 50 to deposit £4,000 a year. The government will add a 25% bonus to those savings, up to a maximum of £1,000 per year. The money can be used either to buy a first home or after the age of 60. It can also be accessed without penalty if you are terminally ill. Withdrawals for any other reason are normally subject to a 25% charge.
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Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Before investing into a fund, please read the relevant key information document which contains important information about the fund. Eligibility to invest in an ISA and tax treatment depends on personal circumstances and all tax rules may change in the future. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.
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