Here’s some bad news for millions of British savers and investors. Chancellor Rachel Reeves has announced a new tax on ‘tax-free’ Stocks and Shares ISAs. What is this tax and will you be affected? Read on to find out how to legally dodge it!
ISAs attacked again
The UK national debt stands at £2.9trn and we borrowed around £129bn in 2025/26, with debt interest amounting to £110bn of this sum. That’s why there’s nothing new in fiddling with the ISA rules. Successive governments have been moving the goalposts since ISAs — Individual Savings Accounts — replaced PEPs and TESSAs in April 1999 (an event I remember well).
Even so, the government will introduce a new tax on cash interest earned inside Stocks and Shares ISAs. The rate will be 22%, in a clear attempt to prevent savers hoarding cash inside share-based ISAs. This new tax will take effect from next tax year (2027/28).
Also, from April 2027, savers aged under 65 can put a maximum of £12,000 a year (currently £20,000) into Cash ISAs. These new rules are aimed at pushing cash savers into investing more into shares.
A low-risk tax dodge
Happily, my family portfolio will not pay this new tax, as we invest in money-market funds (MMFs) instead of cash. However, MMFs are not entirely risk-free — unlike cash deposits, which are protected by the Financial Services Compensation Scheme (FSCS).
What are MMFs? They are funds — or shares in exchange-traded funds (ETFs) — that own rolling portfolios of short-term, high-quality debts and cash-like instruments. These include ultra-safe UK government bonds, plus certificates of deposit issued by strong banks, commercial paper issued by quality companies, and repurchase agreements (repos).
Typically, UK MMFs benchmark themselves against SONIA, the Sterling Overnight Index Average used as a baseline for many sterling debts. Right now, MMFs offer after-fees yields of 3.5% to 4% a year, versus the Bank of England base rate of 3.75% a year.
Top MMFs (and their ETF-based cousins) offer daily buying/selling, low charges, and risk ratings of one — on a scale of one (lowest risk) to seven (highest risk). MMFs maintain stable, steadily rising net asset values (NAVs) and have minimal investment risk. Typical yearly charges range from 0.05% to 0.2% — the lower, the better, usually.
My own favourite
Again, MMFs are not savings accounts and are not covered by the FSCS guarantee. Yet, my family keeps a hefty sum invested in one: the Vanguard Sterling Short-Term Money Market Fund (VASTMGA).
This is an accumulation fund, so it doesn’t pay out monthly interest. Instead, coupons are reinvested to lift the fund’s NAV. The fund’s £2.7bn current portfolio includes IOUs from 27 quality borrowers and charges 0.12% a year. In the year to end-May, it returned 3.89%. From March 2024 to end-May, it returned 10.26%.
Within UK pensions and Stocks and Shares ISAs, MMF distributions are tax-free. However, Rachel Reeves already plans a new rule to prevent investors from holding 100% of a Stocks and Shares ISA in MMFs. Yet more fiddling!
Finally, we at The Twelfth Magpie firmly believe that investing in the shares of great companies is one of the best routes to build wealth. While savings and MMFs are fine for short-term returns, I know no-one who got rich by sitting on cash. As one Russian proverb wisely states, “Those who take no risks drink no Champagne”!
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Cliff D’Arcy has an economic interest in the Vanguard Sterling Short-Term Money Market Fund.
