HMRC moves to block cash ISA loophole as savers face £162 tax bill

The measures are linked to changes announced in the Autumn Budget, which included a reduction in the annual cash Isa allowance.

From 2027, savers aged under 65 will see their cash Isa allowance cut from £20,000 to £12,000.

Under existing rules, individuals can currently save up to £20,000 each year across any combination of Isa products without paying tax on interest or investment returns.

That flexibility has prompted concerns within Government that savers could shift excess funds into stocks and shares Isas, and leave the money as cash.

Such an approach would allow individuals to continue sheltering up to £20,000 from tax despite the lower cash Isa cap.

HMRC said it is acting to prevent this practice from undermining the policy objective of the reforms.

Under the proposed rules, interest earned on cash held within investment Isas could be subject to a 20 per cent tax charge.

Based on current interest rates offered by Trading 212, savers holding £10,000 in uninvested Isa cash could face a charge of £81.

Those with £20,000 held as cash would see £162 deducted from their interest.

The changes would apply only to those under 65 and would not come into force until 2027.

Industry figures said the proposal could affect investors who temporarily hold cash while deciding where to invest.

Jason Hollands, managing director at investment platform Bestinvest, said: "This risks undermining the tax-free promise of Isas."

He said holding cash within an Isa is a normal and legitimate part of investment behaviour.

"It is perfectly reasonable for a genuine investor to have periods when they are holding cash," he continued.

"You have money in your account, you don't often invest it immediately because you want to secure the allowance, and then decide where you want to invest it," he added.

Mr Hollands said cash balances can build up naturally because of market uncertainty, dividend payments and delays between trades.

He suggested there were alternative ways to address the issue without imposing a flat charge on interest.

"A more elegant way than just having a punitive charge would be to have a time limit," he said.

Mr Hollands said a three-month grace period could allow investors time to deploy funds without facing a tax penalty.

HMRC confirmed that it plans to introduce new regulations to close the loophole.

An HMRC spokesman said: "Rules will be introduced to avoid circumvention of the lower limit for cash Isas, including where interest is paid on cash held within an account."

The spokesman added further details would be published before the changes take effect.

They revealed that the proposals would be subject to consultation with industry stakeholders.

Labour has not yet confirmed whether exemptions or transitional arrangements will apply.