From April 2027, a new 22% tax charge will be levied on interest earned from cash held within Stocks and Shares ISAs and Innovative Finance ISAs. This marks a notable departure from the long-standing principle of tax-free growth within the Individual Savings Account wrapper, fundamentally altering how many savers approach their portfolios.
The overall ISA allowance, a familiar £20,000 per tax year, will remain unchanged until 2030. However, the specifics of how this allowance can be utilised are undergoing a significant recalibration, particularly for cash holdings.
What Changed and By How Much
The most striking change is the introduction of a 22% flat-rate tax on interest generated by cash within non-Cash ISAs, effective from April 2027. This charge is applied irrespective of an individual's income tax band – whether basic, higher, or additional rate – and crucially, any interest subject to this charge will not count towards your Personal Savings Allowance (£1,000 for basic rate taxpayers, £500 for higher rate taxpayers).
Simultaneously, the annual Cash ISA allowance for individuals under 65 will be reduced from £20,000 to £12,000, also from April 6, 2027. For those aged 65 and over, the Cash ISA allowance will remain at the full £20,000, an entitlement that begins in the tax year they turn 65.
Furthermore, from April 2027, transfers from non-Cash ISAs (Stocks and Shares, Innovative Finance) into Cash ISAs will no longer be permitted for those under 65. This effectively creates a clearer demarcation between investment and cash savings wrappers.
Money Market Funds (MMFs) will be classified as "cash-like" assets. While they can still be held within non-Cash ISAs, they will not be subject to the 22% tax rate, provided they do not constitute 100% of the investments in the account. This nuance offers a potential avenue for those seeking cash-like liquidity without incurring the new tax.
The Rationale and Rising Complexity
The Treasury has stated these new rules are designed to deter investors from using the more generous Stocks and Shares ISA allowance to hold cash or equivalent assets. The government's stated objective is to encourage retail investment and ensure savers achieve better returns from their investments. This comes after a record £103 billion was subscribed to adult ISAs in the 2023/24 tax year, with Cash ISAs alone accounting for £69.5 billion – a 67% increase from the previous year. The estimated cost of ISA tax relief to the Exchequer for the 2024-25 tax year stands at approximately £9.4 billion, suggesting the Exchequer's generosity, while substantial, has its limits.
However, financial experts suggest these changes could introduce greater complexity into the UK's savings regime. The clear lines that once defined ISA tax benefits are now somewhat blurred for certain cash holdings.
Scenario: What this means for your cash
Consider a scenario where you hold £10,000 in cash within a Stocks and Shares ISA, earning an AER of 4%. Under the current rules, the £400 interest earned would be entirely tax-free. From April 2027, however, this £400 interest will be subject to the new 22% charge. This means £88 (22% of £400) will be deducted as tax, reducing your net interest to £312. This is a direct tax liability on funds previously shielded, regardless of your income bracket or Personal Savings Allowance.
What this means for you
If you currently hold significant cash sums within a Stocks and Shares ISA, you will need to decide whether to move that cash into a dedicated Cash ISA, accept the 22% tax charge, or invest it fully.
Step-by-step: What to do right now
- Review your ISA holdings: Identify any cash balances held within your Stocks and Shares ISA or Innovative Finance ISA.
- Assess your strategy: Determine if these cash holdings are intended for short-term liquidity or are awaiting investment.
- Consider reallocation: If the cash is not earmarked for immediate investment, it may be worth considering moving it to a dedicated Cash ISA, subject to the new £12,000 allowance for under 65s. Remember, the Lifetime ISA (LISA) offers a 25% government bonus on contributions up to £4,000 per year for first-time buyers, which could be a more tax-efficient option for specific goals, although a consultation is underway to replace it with a new First Time Buyer ISA.
- Understand your Personal Savings Allowance: Ensure you are utilising your PSA for any interest earned outside of an ISA wrapper.
- Seek guidance: For complex situations, many advisers recommend consulting an independent financial adviser to tailor a strategy to your specific circumstances.
When Effective
The key changes, including the 22% tax on cash interest in non-Cash ISAs and the reduced Cash ISA allowance for under 65s, will come into effect from April 2027. HMRC's detailed "anti-circumvention" rules, which support these reforms, were outlined in a GOV.UK factsheet published on June 23, 2026.
Where to get help
For personalised advice on navigating these changes and optimising your savings strategy, consider seeking guidance from an independent financial adviser. Information is also available on GOV.UK.
Sources
- HM Revenue and Customs (HMRC) — ISA reform 2027: anti-circumvention rules factsheet (June 23, 2026)
- The Treasury — Statement on ISA reforms (Autumn Budget 2025)
- Morningstar — ISA Tax Changes Explained: What Savers Need to Know
- Money Saving Expert — Cash held in stocks and shares ISAs to be hit with 22% charge on interest from April 2027
- GOV.UK — ISA reform 2027: anti-circumvention rules factsheet (June 23, 2026)
This is not financial advice. Seek independent financial guidance. Interest on standard accounts may be subject to tax above your Personal Savings Allowance.