Financial advisers have spoken out against the Treasury’s plans to tax cash held in stocks and shares ISAs.
The move means that, in effect, stocks and shares ISAs would lose their tax free status for the first time.
There were an estimated 4.1m individuals with a total of £31.1bn invested in stocks and shares ISAs in the 2023/24 tax year and about 9.9m people had Cash ISAs.
Advisers from St James’s Place, Saltus, The Openwork Partnership, and Isio Wealth Management said that the new ISA rules would add complexity while failing to address the barriers to investing.
Mark Campbell, head of wealth planning at Isio Wealth Management, said: "Although this will increase the tax take for HMRC, it is a flawed approach to encourage individuals to invest. It creates yet more complexity in a world where many people already struggle either to access financial advice or understand its value - admittedly, as much a reputational challenge that we as an industry must continue to address.”
He added that good financial education would do far more to prepare people for making financial decisions and boosting the amount that Britons invest.
He said: “Tweaking the tax treatment of cash held within ISAs, or limiting the amount of cash people can hold in them, will not address the elephant in the room. The government continues to overlook the underlying issues of financial confidence and education that prevent many people from engaging with investing in the first place."
Earlier this week the Treasury announced plans to tax the interest earned on cash held in stocks and shares ISAs.
For holders of stocks and shares ISAs, the rule change will impose a 22% tax charge on interest paid on cash held in non-Cash ISAs, costing some ISAs holder with significant cash holdings potentially hundreds of pounds or more in extra tax a year.
Sarah Hogan, director of Openwork Partnership firm KBA Financial, said the changes could actually lead to people investing less.
She said: “The biggest risk is behavioural. People who are already nervous about investing could see these changes as another reason to delay. If the aim is to build a stronger investment culture, we need clear guidance, financial education and confidence-building, not rules that make people feel they could accidentally get something wrong.”
Henrietta Grimston, Chartered Financial Planner at wealth management firm Saltus, said: “The clarification from Government on how cash will be treated within Stocks & Shares ISAs marks a significant tightening of how the ISA wrapper is expected to be used in practice. While the policy intent is to encourage more long-term investing, it will inevitably change how many savers think about flexibility within their portfolios.
“For many people, ISAs are a practical wrapper that allows savings to be managed across different goals – from short-term access needs through to longer-term growth – within a single, familiar, and trusted structure.
“In practice, cash and near-cash allocations within ISAs often form part of an intentional asset allocation decision, used to manage sequencing risk, volatility and liquidity requirements within a broader investment strategy, and are rarely static, typically being adjusted as part of ongoing portfolio management rather than held as a default cash shelter. This reflects genuine planning needs, with investors often holding liquidity for upcoming commitments or to manage market volatility – particularly where individuals are managing their own finances without the support of a professional adviser. Even in the scenario where an adviser is in place, this could result in investors going against the advice of their adviser to avoid a 22% tax charge."
Claire Trott, head of advice at St James’s Place, agreed that the additional complexity could present another barrier to investing.
She said: “One of the strengths of the ISA system has been that people generally understand the broad principle that money held within the wrapper can grow free from UK income and capital gains tax. As rules become more nuanced, there is a risk that consumers become less certain about how their savings will be treated and whether they need to take action.
“For experienced investors, these changes may simply represent another consideration when managing their finances. However, for those considering investing for the first time, additional complexity can become a barrier in itself. If people feel unsure about how the rules work or what products are most appropriate for them, some may delay taking the first step towards investing.”