Taxing Interest On Uninvested Cash In Stocks & Shares ISAs Is Idiotic – Here’s Why…

The latest anti-circumvention update to the 2027 ISA reform, where the 22% taxation of profits from interest on uninvested cash in stocks and shares ISA, is yet another stupid move from the Government that claims to want to get British people investing but is actually putting them off.

Firstly, I get it, the reduction of the Cash ISA limits to £12,000 in the Autumn Budget was designed to encourage savers to open a stocks and shares ISA and invest instead. This makes sense because there is more money to be made in the long-term by investing in the stock market, as opposed to holding your money in cash interest-paying accounts that will eventually lose money because of inflation.

On the surface, that makes sense, because if you want tax-free profits, you’ll go for the account where you can deposit more. But it’s daft, because it’s making things worse, and things should not be made worse, they should be made better.

I think they should have got rid of the cash ISA altogether, because all it actually does is make people lose money in the long run as inflation is higher than interest rates.

I’m not the only one who thinks so, Cem Eyi, Co-Founder at The Beanstalk App, who I interviewed after winning Best Junior JISA 2026  said “I don’t think cash junior ISA should be a thing. Especially if you’ve got a young child that you’re trying to save for. Almost certainly over an 18-year horizon, your returns from investment are likely to beat returns from cash after inflation.

Also, Wander Rutgers, the Lightyear UK CEO which won best investing app in our 2026 Good Money Guide Awards, said if you take “the last 10 years of FTSE 100 returns, you would need to have put in half the amount of money than if you had taken the cash ISA rate over the last decade.”

He also said:

The Stocks and Shares ISA is the most amazing vehicle. No country or very few countries have it.

Which is true, the UK is a great place to invest, especially in small-cap stocks on the London Stock Exchange, but I’ve yet to see any reforms about making that better. Oh wait, there was a reform that removed the 100% inheritence tax relief for those who backed British listed companies on the AIM market. So, the Government put people off investing there too.

But there is hope for growth companies in the UK, just watch our latest interviews with Alexandra Jackson, Rathbones UK Opportunities Fund Manager on the hidden gems of the UK market and Indriatti van Hien, The Henderson Smaller Companies Investment Trust PLC Fund Manager on why small cap shares in the UK are massively undervalued if you don’t believe me.

Michael Summersgill, the CEO of AJ Bell said of the ISA reforms taxing interest payments on uninvested cash in stocks and shares ISAs that “there’s also a risk of unintended consequences. Investors approaching major life milestones may feel pressured to de-risk earlier than they otherwise would, while others could adopt a ‘use it or lose it’ mentality with Cash ISAs, reinforcing (not reducing) the appeal of cash.”

This makes perfect sense because the younger you are the more risk you should take and invest in the stock market with more capital growth potential. But as you approach retirement, you don’t want to run the risk of short-term stock market crashes, so you should instead rebalance your portfolio to include more dividend and interest-paying products like money market funds.

The reforms do so that you can do this and not be taxed, but, you will be if your investment ISA is 100% money market funds.

Dan Moczulski, the CEO of eToro UK, one of the biggest and most innovative investment apps in the world, said, “British savers are too entrenched in cash. What was publicised as a nudge towards creating a much-needed investing culture in the UK has been undermined before it has even started.”

So there you have it. Stocks & Shares ISAs are better than Cash ISAs.

Yes, there is a chance that if you invest poorly, you run the risk of losing some or even all of your money. But over time, if your funds are invested in a global index tracker, you’ll almost certainly come out on top.

Which brings me on to why taxing interest on uninvested cash in stocks and shares is so utterly short-sighted and stupid.

There is currently a campaign running in the UK called, Invest For The Future, which is run by the Investment Association and backed by the Government to encourage people to invest. That too is stupid because they have chosen a squirrel as its Take The Next Step Invest mascot called savvy (lots of people took the mick). Because squirrelling is a term for saving, not investing.

These two things are designed to encourage people to invest in the long-term rather than save. But, both send the singnal that actually the Government doesn’t want people to invest.

Over the past year or so, one of the biggest drivers of growth for investment platforms in the UK has been offering interest on uninvested cash on stocks and shares investing accounts. Investment platforms have been able to get there offer in comparison tables, offering rates well above what banks and traditional Cash ISAs can offer.

Now, clearly, this is a loss leader. It simply does not make financial sense to offer 5% interest on uninvested cash, when the Bank of England base rate is 3.75% because they will lose money on every single customer.

So, obviously, they offer these excellent interest rates because they are hoping to educate savers who may not have invested before on the joys of investing, the pure pleasure of compounding returns, and passive investing.

I also accept that everyone has an ulterior motive for everything, and that is usually to make money.

For the Government, it’s so that savers have to pay more tax on their savings if they may need the money in the short term.

For investment platforms, it is so that they can convert savers into investors who pay commission and account fees.

For me, writing this article is so that you may view our stocks and shares comparison tables, click on a link and open an account with a provider that advertises on Good Money Guide.

What they should have done is not mess around with the Cash ISA in the first place, and instead focus on making the UK stock market more appealing to investors. But, now that they have made the cash ISA worse, just get rid of it as two separate sets of rules are too complicated.

Much better, to keep it simple and focus on the stocks and shares ISA.

Oh yeah, and whilst the greedy Government is thinking about it, why not get rid of Stamp Duty on shares.

That would send a real message that the Government wants to back investors in the UK instead of taxing them.

Go on, I dare you…