New ISA Tax: Savers Under 65 Face 22% Charge on Cash in Investment ISAs

From April 2027, individuals under the age of 65 could face a 22% tax on any interest earned from cash held within their Stocks and Shares ISAs or Innovative Finance ISAs. This proposed measure by HM Revenue & Customs represents a notable departure from the long-standing principle of tax-free growth within the Individual Savings Account framework.

What's Changing and When

The upcoming changes, slated for April 2027, primarily target savers under 65 and introduce a new layer of complexity to ISA management. The key shifts are:

• Tax on Investment ISA Cash: Interest generated from cash balances within Stocks and Shares ISAs or Innovative Finance ISAs will no longer be universally tax-free for those under 65. A flat-rate charge of 22% is currently under consideration by the Treasury, aligning with proposed increases in general savings income tax rates for the same period.
• Reduced Cash ISA Allowance: For individuals under 65, the annual Cash ISA allowance will be cut from £20,000 to £12,000. Those aged 65 and over will retain the full £20,000 Cash ISA allowance.
• Transfer Restrictions: From April 2027, transfers of funds from Stocks and Shares ISAs and Innovative Finance ISAs into Cash ISAs will be prohibited for individuals under 65.

The overall annual ISA subscription limit, however, is set to remain at £20,000 until at least April 2031, providing some stability amidst these adjustments.

The Numbers Behind the Shift

This policy shift arrives at a time when interest rates have seen a sustained period of elevation. As of April 30, 2026, the Bank of England base interest rate stands at 3.75%, a level held by the Monetary Policy Committee. Higher base rates mean more substantial interest earnings on cash, which in turn makes such holdings a more attractive target for taxation.

The average gross financial wealth in the UK is £76,301 per household, according to ONS statistics, though the median is a more modest £12,500. With the average savings amount in the UK at £19,214 in 2026, and 39% of Britons holding £1,000 or less, these changes will predominantly affect those with larger cash reserves within their investment ISA wrappers.

Scenario: The Impact on Your Cash Holdings

Consider a saver, aged 45, who holds £10,000 in cash within their Stocks and Shares ISA, perhaps awaiting an investment opportunity or simply as a defensive position. With the Bank of England base rate at 3.75%, let's assume their ISA provider offers a competitive 3.5% interest on that cash. This would generate £350 in interest annually. Under the proposed 22% tax, this saver would pay £77 in tax, reducing their net interest to £273. Previously, this entire £350 would have been tax-free.

Understanding Your Tax Wrappers

These changes underscore the importance of understanding the various tax-efficient savings options available:

• Cash ISA: This remains a tax-free wrapper for cash savings, though its annual allowance for under 65s will be reduced to £12,000 from April 2027. Interest earned within a Cash ISA is not subject to income tax.
• Lifetime ISA (LISA): Designed for first-time buyers or retirement savings, the LISA offers a 25% government bonus on contributions up to £4,000 per year, equating to a maximum bonus of £1,000 annually. This remains a highly attractive option for eligible individuals.
• Personal Savings Allowance (PSA): This allowance permits basic rate taxpayers to earn up to £1,000 in interest tax-free outside of an ISA, while higher rate taxpayers can earn £500. Any interest earned above these thresholds is subject to income tax at your marginal rate. The proposed 22% flat rate for cash in investment ISAs, however, operates distinctly from the PSA.

For those holding substantial sums in standard savings accounts, it is always worth considering ISA alternatives to maximise tax efficiency, particularly given that interest above your Personal Savings Allowance is taxable.

What this means for you

If you are under 65 and currently hold significant cash balances within a Stocks and Shares ISA or Innovative Finance ISA, you will need to review your strategy before April 2027. The introduction of a 22% tax on this interest means that simply leaving cash uninvested within these wrappers will become less tax-efficient. You may need to consider moving these funds into a dedicated Cash ISA or exploring other investment avenues to maintain tax-free growth.

What Critics Say

The proposed changes have drawn concern from the financial industry. Reports suggest that the Treasury's move to tax cash in investment ISAs, potentially at 22%, is seen by some as undermining the fundamental principle of the ISA wrapper. The Financial Times and The Telegraph have highlighted industry warnings about the impact of such a charge, suggesting it could complicate financial planning and reduce the attractiveness of ISAs as a whole. The argument often made is that ISAs were designed to simplify tax-efficient saving, and these new rules introduce an unwelcome layer of complexity.

Step-by-Step: What to do right now

1. Review Your Holdings: Check your Stocks and Shares ISA and Innovative Finance ISA accounts for any uninvested cash balances.
2. Assess Interest Earnings: Calculate the potential interest you might earn on these cash holdings, considering the current Bank of England base rate of 3.75% (as of April 30, 2026) and your provider's rates.
3. Consider Your Options Before April 2027: If you are under 65, evaluate whether moving these cash funds into a Cash ISA, up to the current £20,000 limit, or the reduced £12,000 limit from April 2027, would be more tax-efficient. Remember, transfers from investment ISAs to Cash ISAs will be blocked for under 65s from April 2027.
4. Explore Investment Alternatives: If the cash is intended for investment, consider whether it's time to deploy it into suitable assets within your Stocks and Shares ISA, rather than letting it sit as taxable cash.

Where to get help

For personalised advice on how these changes might affect your specific financial situation, it is advisable to consult a qualified independent financial adviser. Your ISA provider may also be able to offer general guidance on their specific products.

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