The recent negative ISA headlines are a bit misleading

Tuesday 7th July 2026

Budget 2025 - 2% Tax Increase and ISA Changes

The recent ISA headlines have overshadowed the significant Budget 2025 announcement of a 2% increase in tax on certain forms of investment income. Importantly, this is not a rise in the main rates of income tax on earnings or pensions, which at one point in the pre-budget rumours we thought would happen.

The New 2% Tax Charge on Savings, Dividends and Property Income

The Government announced that income derived from assets will be taxed more heavily than earned or pension income:

• Dividend tax rates increased by 2% from 6th April 2026 for all tax bands except the highest.
• Tax rates on savings income outside of ISAs will also increase by 2% from April 2027 for all tax bands, so basic rate tax for example from 20% to 22% on your interest.
• Property income, likewise, will also increase by 2% from 6 April 2027 for all tax bands.

Remember the Personal Savings Allowance remains unchanged, meaning many savers continue to receive some interest tax-free outside of an ISA. We have mentioned before how this potentially means an allowance of £6,000 in total against your interest and we can discuss this more when we next see you.

What Does This Mean for ISA Investors?

Following the Autumn Budget 2025, the Government confirmed a series of ISA reforms aimed at encouraging greater investment in assets like shares and government bonds, rather than cash saving, to help stimulate economic growth. The key changes, due to take effect from 6 April 2027, include:

• The Cash ISA allowance for individuals under age 65 will reduce from £20,000 to £12,000 per tax year.
• The overall ISA allowance remains £20,000 per tax year.
• The Stocks & Shares ISA allowance remains at £20,000.
• Individuals aged 65 and over will continue to have a £20,000 Cash ISA allowance.

The Media Misunderstanding: “A 22% Tax on ISA Interest”

Several news outlets have reported the introduction of a 22% charge on interest earned within ISAs, leading some people to believe that the fundamental tax-free status of ISAs is ending. This is not correct. The new 22% charge does not apply to Cash ISAs and does not apply to investment returns, i.e. dividends or capital gains within Stocks & Shares ISAs. Instead, the charge will apply only to interest earned on cash balances held inside a Stocks & Shares ISA.

Why Is the Government Introducing This Charge?

The Government is concerned that younger savers could get round the new £12,000 Cash ISA limit by contributing £20,000 to a Stocks & Shares ISA and leaving the money in cash rather than investing it, and therefore continuing to earn effectively tax-free cash returns. In addition those under 65 cannot take out a stocks and shares ISA, to maximise the £20,000, and subsequently switch to a cash ISA until they are 65. To be fair, whilst adding more complexity, it does make sense. It’s a separate question, yet to be answered, if younger savers will opt for the extra £8,000 to Stocks & Shares, within the new rules. Logically, if the money can be left for the medium to longer term, a Stocks & Shares ISA makes sense.

The 22% charge is therefore designed as an anti-avoidance measure, discouraging the long-term holding of cash within investment ISAs.

What Remains Tax-Free?

Importantly, the following remain unaffected:

• Interest earned within a Cash ISA.
• Capital gains within a Stocks & Shares ISA.
• Dividends received within a Stocks & Shares ISA.
• Growth from your investments such as shares and funds held within an ISA.

For most investors using Stocks & Shares ISAs as intended, there should be little or no direct impact. The only time from a planning perspective we expect to see an impact will be when a client is looking to draw the funds in the relatively short term and to lock in gains, so will switch to cash. Sometimes Money Market funds are used which are cash like and they will face additional restrictions.

Our View

Despite some alarming headlines, ISAs remain one of the most valuable tax-efficient savings and investment vehicles available in the UK. The recent reforms do not remove the tax-free status of Cash ISAs and do not introduce taxation on normal investment growth within Stocks & Shares ISAs. The new 22% charge is a targeted measure aimed at preventing the use of Stocks & Shares ISAs as a substitute for Cash ISAs following the reduction in the Cash ISA allowance, and does make sense.