Rachel Reeves set to make another huge ISA change after 22% tax raid

Rachel Reeves is set to make another major ISA change after confirming a 22% levy on interest earned from cash held in stocks and shares ISAs. The Treasury is consulting on a new savings product aimed at helping first-time buyers get on the property ladder.

Plans for the First-Time Buyer ISA (FTB ISA) were announced on Tuesday (June 23). Proposals for the new product include allowing savers to pay in lump sums and a Government bonus paid at exchange rather than at completion. The current Lifetime ISA (LISA) will continue as it is if or when the FTB ISA begins. LISA is the current tax-free savings account for those aged 18 to 39. It is designed to help savers buy a home or prepare for retirement.

Though subject to change, the FTB ISA proposal, as it currently stands, will be for first-time buyers, not retirement.

The new tax-free savings product will offer a cash option as well as a stocks and shares choice.

Savers with a Help to Buy ISA will be able to transfer their money into an FTB ISA, but LISA-holders won’t be able to, as they already receive a government bonus at the end of each month.

Details of the threshold set for an FTB ISA have yet to be confirmed.

The current threshold for a Help to Buy ISA is £450,000 in London and £250,000 in the rest of the UK.

For a LISA, savers can use the balance on their account to buy their first home if the property costs £450,000 or less.

News of the FTB ISA came on the same day HM Revenue & Customs (HMRC) published further details about changes to cash held in stocks and shares ISAs.

The 22% levy aims to prevent savers from getting around new Cash ISA limit rules, due to be introduced next year.

At the autumn Budget in 2025, Ms Reeves announced that from April 2027, the annual Cash Isa allowance would be reduced to £12,000 for savers aged under 65.

The limit for stocks and shares and innovative finance ISAs will remain at £20,000, alongside moves to encourage an investment culture.

HMRC said rules will be introduced to prevent people from subscribing up to £20,000 cash in a non-Cash Isa and leaving it there long-term, earning tax-free interest.

The rules also aim to stop people subscribing £20,000 to a non-Cash ISA then transferring those funds to a Cash ISA, or subscribing £20,000 to a non-Cash ISA and using the funds to purchase “wholly cash-like” investments.

Among the changes, there will be a 22% flat rate charge on interest or alternative finance return paid on cash held within a non-cash ISA.

There was a mixed reaction to yesterday’s news from finance experts.

Andrew Gall, Head of Savings at the Building Societies Association, welcomed the Government providing greater clarity on its proposed ISA reforms.

He added: “It is vital savers have clear information and sufficient time to understand how the changes will affect them and the choices available to them from April 2027.”

Jeremy Cox, Head of Strategy at Coventry Building Society, warned the UK is moving away from a fair and straightforward ISA system where all adults can save or invest up to £20,000 tax-free each year, towards a more complex and confusing set of rules that will feel unfair to many consumers.

Andrew Prosser, Head of Investments at InvestEngine, said: “Our worry is that instead of encouraging investing, this could end up putting people off.

“If stocks and shares ISAs become more complex and less straightforward, some savers may just disengage altogether – which would go against the whole point of trying to build a stronger investing culture in the first place.”