From April 6, 2027, any interest earned on cash held within a Stocks and Shares ISA or an Innovative Finance ISA will be subject to a flat-rate tax of 22%. This move, confirmed by the Treasury and HMRC on Tuesday, June 23, 2026, represents a substantial redefinition of the tax-free wrapper that ISAs have long provided.
What Changed and By How Much?
The core alteration is the introduction of a 22% charge on interest or 'alternative finance return' from cash held in non-Cash ISAs. This rate aligns with the new basic rate taxpayer savings interest tax, also set to rise to 22% at the same time. For those accustomed to the entirely tax-free nature of ISA returns, this is a distinct departure.
Beyond this, several other significant changes are coming into effect:
- Cash ISA Allowance Reduction: For individuals under 65, the annual Cash ISA allowance will be cut from £20,000 to £12,000 from April 6, 2027. This means less scope for tax-free cash savings for many.
- Stocks and Shares ISA Allowance: The annual allowance for Stocks and Shares ISAs and Innovative Finance ISAs will remain at £20,000. The overall ISA allowance also stays at £20,000.
- Over 65s Exception: Individuals aged 65 and over will retain their £20,000 Cash ISA allowance. They will also gain the flexibility to transfer funds from non-Cash ISAs into their Cash ISA from the start of the tax year they turn 65.
- Money Market Funds (MMFs) Restriction: Non-Cash ISAs will be prohibited from being 100% invested in 'cash-like assets' such as Money Market Funds. MMFs are still permitted, but only as part of a diversified portfolio.
- Transfer Limitations: For those under 65, transfers from non-Cash ISAs into Cash ISAs will no longer be permitted. However, the ability to transfer money from Cash ISAs into investment accounts will remain.
- First-Time Buyer ISA Consultation: The Treasury has also launched a consultation on a new, simpler First-Time Buyer ISA, which will have no upper age limit and is intended to replace the existing Lifetime ISA. The Lifetime ISA currently offers a 25% government bonus on contributions up to £4,000 per year, providing a maximum bonus of £1,000 annually for first-time buyers.
Why These Changes Now?
HMRC and the Treasury describe these as 'anti-circumvention rules'. The government's stated aim is to support reforms announced in Budget 2025, which Chancellor Rachel Reeves outlined in Autumn 2025. These reforms included ending the Lifetime ISA and lowering the Cash ISA cap for under-65s, with the broader goal of fostering a 'retail investment culture' by encouraging people towards stocks and shares.
The official rationale is to 'minimise the opportunity for the lower Cash ISA limit to be circumvented, while preserving the flexibility needed for legitimate investment activity within non-Cash ISAs.' In essence, the government seeks to prevent individuals from using the higher non-Cash ISA allowance to hold significant sums of cash long-term for tax-free interest, or from using these funds to purchase wholly cash-like investments.
Scenario: What This Means for Your Cash Holdings
Consider a basic rate taxpayer under 65 who currently holds £15,000 in cash within their Stocks and Shares ISA, perhaps awaiting a market dip or as a strategic low-risk component. If this cash earns 4% interest annually, they would typically receive £600 tax-free. From April 6, 2027, that £600 interest will be subject to the 22% tax, meaning £132 will be deducted, leaving them with £468. This is a direct reduction in their tax-free return.
What this means for you
If you currently hold uninvested cash within a Stocks and Shares ISA, or if you're under 65 and rely on a Cash ISA for significant savings, you will need to review your strategy. The tax on cash interest in investment ISAs, coupled with the reduced Cash ISA allowance, means the traditional approach to tax-free savings is shifting. For those considering property, the consultation on a new First-Time Buyer ISA replacing the Lifetime ISA will be a key development to watch.
The Other Side: Erosion of Trust and Unintended Consequences
Industry experts have not been shy in their criticism. Simon Harrington, Head of Public Affairs at PIMFA, described these measures as 'draconian anti-avoidance measures', questioning their effectiveness in genuinely altering consumer behaviour towards investment. Rachel Vahey, AJ Bell head of public policy, suggested the decision is 'riddled with unintended consequences'.
Many view these changes as a significant erosion of the ISA's original tax-free promise, particularly for cash held within investment wrappers. Critics argue that the increased complexity and the introduction of new tax charges could, paradoxically, discourage new investors rather than encourage them, by making the ISA landscape less straightforward and less appealing.
Step-by-Step: What to Do Right Now
While the changes are not effective until April 6, 2027, proactive planning is prudent:
- Review Cash in Non-Cash ISAs: Assess how much uninvested cash you hold in your Stocks and Shares or Innovative Finance ISAs. Consider whether this cash could be better utilised in a dedicated Cash ISA, up to the new £12,000 limit for under-65s, or invested in qualifying assets.
- Maximise Cash ISA: If you're under 65, consider maximising your Cash ISA allowance before the reduction takes effect. Remember, the Personal Savings Allowance allows basic rate taxpayers to earn £1,000 in interest tax-free outside an ISA, and higher rate taxpayers £500. Interest above this is taxable.
- Understand MMF Rules: If you use Money Market Funds within a non-Cash ISA, ensure they do not constitute 100% of your portfolio.
- Consider Investment Strategy: These changes reinforce the government's push towards equity investment. Review your investment goals and risk tolerance to ensure your portfolio aligns with the intended purpose of a Stocks and Shares ISA.
- Stay Informed on FTB ISA: If you are a first-time buyer, monitor the consultation on the new First-Time Buyer ISA. The current Lifetime ISA offers a 25% government bonus on contributions up to £4,000 per year, which is a significant benefit to consider while it remains available.
When Effective
All the new rules, including the 22% tax on cash interest in non-Cash ISAs and the reduced Cash ISA allowance for under-65s, will come into force from April 6, 2027.
Where to Get Help
For personalised advice on how these changes might affect your specific financial situation, consider speaking with an independent financial adviser. They can help you navigate the complexities of ISA rules and optimise your savings and investment strategy.
This is not financial advice. Seek independent financial guidance. Interest on standard accounts may be subject to tax above your Personal Savings Allowance.
Sources
- HMRC/Treasury — Announcement of new rules, June 23, 2026
- GOV.UK Factsheet — "ISA reform 2027: anti-circumvention rules factsheet," June 23, 2026
- Chancellor Rachel Reeves — Autumn 2025 Budget statements
- Simon Harrington, Head of Public Affairs, PIMFA — Expert commentary
- Rachel Vahey, Head of Public Policy, AJ Bell — Expert commentary