NEWS | TAX & SAVINGS
TL;DR
HMRC has confirmed a 22% tax charge on cash interest earned inside Stocks and Shares ISAs from April 2027, alongside a £12,000 annual Cash ISA limit for under-65s. The rules are designed to close a loophole but have drawn sharp criticism from the savings industry.
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Key Facts
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What HMRC has confirmed
The Treasury published three core rules on 23 June 2026 that will form the basis of the new ISA regime taking effect from April 2027. HMRC's stated goal is to stop savers using Stocks and Shares ISAs as a workaround for the incoming Cash ISA limit, and to shift the UK away from cash-heavy saving toward equity investment.
The first rule introduces a flat 22% tax charge on any interest or alternative finance paid on cash held inside non-cash ISAs. This charge did not apply under the previous system, where all returns inside any ISA wrapper were fully tax-free regardless of their nature.
The second rule prevents non-cash ISAs from being wholly invested in money market funds or similar "cash-like assets". Accounts that are 100% invested in such instruments will be reclassified as non-qualifying for ISA purposes.
The third rule blocks transfers from non-cash ISAs into Cash ISAs, though transfers in the opposite direction - from Cash ISAs into investment accounts - will still be permitted.
Why the government is making these changes
The changes follow the Autumn Budget 2025, in which Chancellor Rachel Reeves announced the cut to the Cash ISA allowance for under-65s. That decision was driven by a government assessment that UK households hold too large a proportion of their savings in cash relative to other G7 nations, and that redirecting retail savings into equity markets would support domestic business investment and economic growth.
Without the new 22% charge and the money market fund restriction, the government identified a straightforward loophole: any saver could deposit up to £20,000 into a Stocks and Shares ISA and simply leave it in cash, effectively bypassing the new £12,000 Cash ISA limit entirely.
A 20% charge on cash interest inside Stocks and Shares ISAs existed prior to 2014. The new 22% rate is aligned with the incoming savings interest tax rate that takes effect from April 2027.
Industry reaction
The response from the savings and investment sector has been broadly critical. Industry figures have questioned whether the rules are well designed and whether they will achieve the government's stated aim of encouraging new investors.
Concerns centre on added complexity making Stocks and Shares ISAs harder to understand for first-time investors, reduced flexibility for savers who move between cash and equity positions within a single wrapper, and the risk that complexity will deter people from investing altogether rather than nudge them toward it.
Some industry voices have welcomed the direction of travel, arguing that a level playing field between cash and investment ISAs supports the long-term case for greater retail participation in equity markets. However, even supportive commentary has flagged the risk of unintended consequences if the rules are introduced before sufficient data exists on how savers are actually behaving under the new Cash ISA limit.
What changes and when
The £12,000 Cash ISA limit for under-65s does not take effect until April 2027. HMRC has confirmed the same implementation date for the 22% cash interest charge and the money market fund restriction. The current tax year (2026/27) is unaffected. Savers who are planning their ISA strategy for the current year can continue to deposit up to £20,000 into any combination of ISA types under the existing rules.
Over-65s will not face the reduced Cash ISA allowance and will retain access to the full £20,000 limit. However, the 22% charge on cash interest inside Stocks and Shares ISAs will apply regardless of age.
How the current ISA allowance works
The annual ISA allowance of £20,000 applies across all ISA types in the current tax year. Savers can split this between a Cash ISA, a Stocks and Shares ISA, a Lifetime ISA (up to £4,000), and an Innovative Finance ISA, subject to the rules of each account type. Returns inside all ISA wrappers are currently free of income tax and capital gains tax.
From April 2027, under-65s will face a sub-limit of £12,000 for Cash ISAs within the overall £20,000 envelope. The remaining £8,000 will need to be directed into non-cash ISA types. Over-65s are exempt from this sub-limit.
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Disclaimer: This article is for general information only and does not constitute financial, legal or immigration advice. Kaeltripton.com is an independent editorial publisher and is not regulated by the FCA, Ofgem or the Home Office. Always check primary sources and consult a qualified adviser before making decisions. |
Frequently asked questions
Will the 22% charge affect existing Stocks and Shares ISAs?
The charge applies from April 2027 to interest paid on cash held inside Stocks and Shares ISAs from that date. HMRC has not confirmed whether legacy cash balances held in ISAs opened before April 2027 will be caught by the new rules. Savers should monitor official HMRC guidance as implementation approaches.
Does this affect Cash ISAs directly?
No. Interest earned inside a Cash ISA remains fully tax-free under the existing rules. The 22% charge applies specifically to cash interest earned inside non-cash ISA wrappers, such as Stocks and Shares ISAs.
Can I still transfer my Cash ISA to a Stocks and Shares ISA?
Yes. Under the new rules, transfers from Cash ISAs into Stocks and Shares ISAs will still be permitted. Only the reverse transfer - from a Stocks and Shares ISA into a Cash ISA - will be blocked from April 2027.
What counts as a "cash-like asset" under the new rules?
HMRC has cited money market funds as the primary example of cash-like assets within the new framework. Funds that are 100% invested in such instruments will be treated as non-qualifying investments inside non-cash ISAs. HMRC is expected to publish fuller technical guidance ahead of the April 2027 implementation date.
Where can I find the official HMRC rules?
The primary source for ISA rules and their updates is GOV.UK - Individual Savings Accounts (ISAs). HMRC technical notices and consultation documents are published at HMRC's official publications page.
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Primary Sources |
