Cash in Investment ISAs to be Taxed from 2027: What You Need to Know

From April 2027, savers could face a 22% tax on interest earned from uninvested cash held within Stocks and Shares ISAs and Innovative Finance ISAs. This significant shift marks a departure from the long-standing principle of entirely tax-free ISA growth, potentially altering how millions manage their savings.

Currently, the £20,000 annual Individual Savings Account (ISA) allowance permits interest, income, and capital gains within any ISA wrapper to grow free from tax. This has made ISAs a cornerstone of UK personal finance, with the market value of adult ISA holdings reaching £872 billion by the end of the 2023-2024 tax year.

What is Changing, and By How Much?

The changes, confirmed by HMRC in the Autumn 2025 Budget, are twofold and come into effect from April 2027:

1. Tax on Cash in Investment ISAs: Interest earned on uninvested cash held within Stocks and Shares ISAs and Innovative Finance ISAs will become taxable. Reports suggest a tax rate of 22%. For basic-rate taxpayers, this is a slight increase from the current 20% tax on savings interest above the Personal Savings Allowance.
2. Reduced Cash ISA Allowance: For individuals under 65, the annual Cash ISA allowance will be reduced from £20,000 to £12,000. Those aged 65 and over will retain the full £20,000 Cash ISA allowance.

To prevent individuals from simply moving funds between ISA types to circumvent these new rules, HMRC will also block transfers from Stocks and Shares ISAs and Innovative Finance ISAs into Cash ISAs from April 2027. Furthermore, new 'tests' will be introduced to determine whether an investment is eligible for a Stocks and Shares ISA or is deemed 'cash-like', a measure aimed at ensuring the spirit of the reforms is maintained.

Scenario: What This Means For You

Consider a saver under 65 who currently holds £20,000 in uninvested cash within a Stocks and Shares ISA, perhaps awaiting a market dip or a specific investment opportunity. If this cash earns 4% interest annually, under the new rules from April 2027, that £800 in interest could be subject to a 22% tax charge. This would result in a tax bill of £176, a sum that would currently be entirely tax-free.

For comparison, the average annual return on a Stocks and Shares ISA over the past decade has been 9.64%, significantly outperforming the 1.2% average for Cash ISAs over the same period. The Treasury spokesman in May 2026 indicated these reforms are designed to encourage more people to invest in stocks and shares, highlighting their historically better performance.

What Critics Say

Industry experts have expressed concerns that these reforms may inadvertently penalise responsible behaviour. Cash can accumulate temporarily in investment ISAs for various legitimate reasons, such as market fluctuations, the receipt of dividend payments, or delays in transaction settlements. The new tax charge could affect those using investment ISAs for short-term cash holdings, not just those deliberately trying to circumvent limits.

What This Means For You

If you currently hold significant uninvested cash within a Stocks and Shares ISA, or plan to, you may need to reconsider your strategy to avoid potential tax charges from April 2027. Reviewing your Cash ISA usage and considering alternative investment strategies is advisable.

Step-by-Step: What To Do Right Now

1. Review your ISA holdings: Identify how much uninvested cash you hold within any Stocks and Shares or Innovative Finance ISAs.
2. Understand the new Cash ISA limit: If you are under 65, be aware that your Cash ISA allowance will be £12,000 from April 2027.
3. Consider your investment strategy: If you hold cash in an investment ISA for short-term purposes, explore whether a Cash ISA (up to the new limit) or a standard savings account (subject to your Personal Savings Allowance) might be more appropriate.
4. Explore other tax wrappers: For first-time buyers, a Lifetime ISA offers a 25% government bonus on contributions up to £4,000 per year, effectively providing up to £1,000 annually towards a deposit.
5. Monitor developments: HMRC has stated that industry will be consulted on the draft legislation. Staying informed as further details emerge will be crucial.

When Are These Changes Effective?

The proposed tax on cash in investment ISAs and the reduction of the Cash ISA allowance for those under 65 are both set to take effect from 6 April 2027.

Where To Get Help

For personalised advice on how these changes might impact 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 strategy.

This is not financial advice. Seek independent financial guidance. Interest on standard accounts may be subject to tax above your Personal Savings Allowance.