For decades, the Individual Savings Account (ISA) has been a cornerstone of tax-efficient saving in the UK, offering a straightforward path to grow your money free from Income Tax and Capital Gains Tax. However, a significant shift is on the horizon. From April 6, 2027, a flat-rate tax of 22% will be applied to any interest earned on cash held within Stocks and Shares ISAs and Innovative Finance ISAs.
What Changed and By How Much
The government's stated aim, according to the Treasury, is to 'deter investors from parking cash or equivalent assets in the stocks and shares wrapper and using the fuller allowance.' The changes, announced in the 2025 Autumn Budget by then-Chancellor Rachel Reeves, introduce a level of complexity that experts suggest could make the UK's savings regime 'even more complex'.
The 22% Flat Tax on Cash in Non-Cash ISAs
This is the headline figure. From April 6, 2027, if you hold cash within a Stocks and Shares ISA or an Innovative Finance ISA, any interest you earn on that cash will be subject to a 22% tax. HMRC has confirmed these 'anti-circumvention' rules, stating the charge will apply universally to all ISA account holders, 'regardless of their age and their income tax bracket,' including non-taxpayers. Crucially, your Personal Savings Allowance (PSA) – which allows basic rate taxpayers to earn £1,000 and higher rate taxpayers £500 of interest tax-free outside an ISA – will not apply to shield this money from the new 22% charge.
Cash ISA Allowance Reduced for Under 65s
Also effective from April 6, 2027, the annual contribution limit for Cash ISAs will be reduced from £20,000 to £12,000 for individuals under the age of 65. For those aged 65 and over, the Cash ISA allowance will remain at £20,000. The overall annual ISA allowance, however, will remain at £20,000 for the 2026/27 tax year and is expected to be frozen at this level until at least 2030/31.
Restrictions on Transfers
Adding another layer of intricacy, new rules will prevent individuals under 65 from transferring money from non-cash ISAs into Cash ISAs from April 2027. This means that once cash is in a Stocks and Shares or Innovative Finance ISA, moving it to a Cash ISA to avoid the 22% charge will become more difficult for younger savers.
Lifetime ISA (LISA) Consultation
Separately, the government has launched a consultation on replacing the existing Lifetime ISA (LISA) with a new First Time Buyer ISA. The proposed new ISA would pay the government bonus at the point of property purchase and remove the current 25% early withdrawal penalty. This consultation is open until August 17, 2026. While potentially simplifying the system, experts like Rachel Vahey of AJ Bell caution that savers could 'lose out on investment growth from the current bonus' by not receiving it upfront.
Scenario: If you have X this means Y
- Scenario 1: Cash in a Stocks & Shares ISA. If you are under 65 and currently hold £5,000 in cash within your Stocks and Shares ISA, earning, say, 4% interest, you would typically expect to receive £200 tax-free. From April 2027, that £200 interest will be subject to a 22% tax, meaning £44 will be deducted, leaving you with £156. This applies even if you are a non-taxpayer or your total interest income is below your Personal Savings Allowance.
- Scenario 2: Maximising Cash ISA savings. If you are 45 and wish to save £15,000 into a Cash ISA in the 2027/28 tax year, you will find your allowance capped at £12,000. To save the full £15,000 tax-free in cash, you would need to utilise your Cash ISA allowance and then consider other tax-efficient options, such as using your Personal Savings Allowance with a standard savings account, or exploring other ISA types within your overall £20,000 limit.
What this means for you
The era of simply 'parking' cash in a Stocks and Shares ISA without tax implications is drawing to a close. You will need to actively review where your cash is held within your ISA wrappers to avoid unexpected tax liabilities. For those under 65, the reduced Cash ISA allowance means a more constrained environment for tax-free cash savings, potentially pushing more funds into investment products or taxable accounts once the £12,000 limit is reached.
Step-by-step what to do right now
- Review your ISA holdings: Check how much cash you currently hold within any Stocks and Shares ISAs or Innovative Finance ISAs. Identify any interest-bearing cash balances.
- Consider reallocating cash: If you are under 65 and have significant cash in a non-cash ISA, it may be worth considering transferring it to a Cash ISA before April 2027, while transfers are still permitted and the £20,000 Cash ISA allowance applies.
- Utilise current allowances: Maximise your Cash ISA allowance of £20,000 for the current tax year and the 2026/27 tax year if you are under 65, before it reduces.
- Explore alternatives for cash: For large sums of cash, consider whether a Cash ISA is the most appropriate wrapper. If you exceed the Cash ISA limit, remember your Personal Savings Allowance can shield some interest in a standard savings account (£1,000 for basic rate, £500 for higher rate taxpayers).
- First-time buyers: If you are saving for your first home, consider the existing Lifetime ISA (LISA) which offers a 25% government bonus on contributions up to £4,000 per year (a bonus of up to £1,000 annually). Monitor the outcome of the First Time Buyer ISA consultation, which closes on August 17, 2026.
When Effective
The key changes regarding the 22% tax on cash in non-cash ISAs and the reduction of the Cash ISA allowance for under 65s will come into effect on April 6, 2027. The consultation on the new First Time Buyer ISA is open until August 17, 2026.
The Other Side
While the Treasury states these rules are designed 'to ensure the policy achieves its objective of encouraging retail investment and supporting better returns for savers,' not everyone is convinced. Simon Harrington, head of public affairs at PIMFA, expressed skepticism, stating, 'We remain sceptical that these changes will deliver.' Jeremy Cox of Coventry Building Society remarked that the UK is 'moving away from a fair and straightforward Isa system... towards a more complex and confusing set of rules that will feel unfair to many consumers.' Andrew Prosser of InvestEngine voiced concern that 'instead of encouraging investing, this could end up putting people off.' Martin Lewis of MoneySavingExpert.com suggested a 'carrot, not stick' approach would have been preferable.
Where to Get Help
Navigating these changes can be complex. For personalised advice on your specific financial situation, it is always recommended to consult an independent financial adviser.
Sources
- HM Treasury — Official statements on ISA rule changes
- HM Revenue and Customs (HMRC) — Anti-circumvention rules for ISAs, report published June 23, 2026
- GOV.UK — Factsheet on ISA rules
- AJ Bell — Rachel Vahey, head of public policy, comments on LISA consultation
- PIMFA (Personal Investment Management & Financial Advice Association) — Simon Harrington, head of public affairs, comments on changes
- Coventry Building Society — Jeremy Cox, head of strategy, comments on ISA complexity
- InvestEngine — Andrew Prosser, head of Investments, comments on investor impact
- MoneySavingExpert.com — Martin Lewis's comments on the changes