Savings Will new rules mean I pay tax on my Isa?

Changes due to take effect next year have become clearer, prompting concern among investors. Hilary Osborne reports

- Hilary Osborne

The way you can invest in Isas will change next April, and for under-65s that will mean a reduced limit on the amount of money that can be saved tax-free in a cash Isa.

This week the new rules became clearer, sparking concern among investors that they may have to pay tax on some of their holdings.

Currently, all growth and other returns paid on holdings in a stocks and shares Isa are tax-free. Under rules outlined by HM Revenue and Customs, from April 2027 investors who have uninvested cash in a stocks and shares wrapper will face a 22% charge on interest it earns.

It is one of several measures designed to stop people getting round the new limits on cash Isas.

What is changing?

The core idea of Isas is staying the same. They are tax-efficient accounts which can be used to hold stocks and shares or cash on deposit. A cash Isa operates like a savings account, your money earns interest which you can keep without paying income tax on it.

A stocks and shares Isa can hold a wide range of investments, such as investment funds, or individual company shares; it can also hold uninvested cash, on which you earn interest; and things called money market funds. These funds are low-risk investments that offer similar returns to cash.

Each adult in the UK can put up to £20,000 into Isas each tax year, but how this can be distributed will be different from next year as the government attempts to encourage more people into investing.