ISA Reforms April 2027: Cash ISA Limit Cut to £12,000 and 22% Tax on S&S ISA Cash Interest Confirmed

What is changing from April 2027

The ISA reforms announced at the Autumn Budget 2025 and confirmed in detail by HMRC on 23 June 2026 introduce four connected changes that take effect simultaneously from 6 April 2027, the start of the 2027/28 tax year.

The first and most widely discussed change is the cut to the cash ISA annual subscription limit for adults under 65. From April 2027, under-65s will be able to contribute a maximum of £12,000 per year into cash ISAs, down from the current £20,000. This is the first reduction to the cash ISA allowance since the account was introduced in 1999 and represents a 40% cut for affected savers.

The second change is the introduction of a 22% tax charge on interest earned on uninvested cash held inside stocks and shares ISAs and innovative finance ISAs. This charge does not apply to returns from shares, investment funds, bonds or other qualifying assets within the wrapper. It applies specifically to cash sitting in a stocks and shares ISA account that has not yet been deployed into investments and is generating interest while it waits.

The third change prohibits under-65s from transferring money from a stocks and shares ISA or innovative finance ISA into a cash ISA from April 2027. Transfers in the opposite direction, from cash ISAs into stocks and shares ISAs, remain permitted. The government has explicitly framed this as preserving a one-way route from cash saving toward investment.

The fourth change restricts how money market funds can be used inside non-cash ISAs. Investors will still be able to hold money market funds inside a stocks and shares ISA, but they will not be permitted to allocate the entire account balance to these instruments. The precise cap on money market fund allocation is subject to the technical consultation that HMRC has confirmed will open shortly.

Why the government is cutting the cash ISA limit

The government's stated objective is to shift UK retail savers toward investment in stocks and shares, which it argues have historically generated higher returns over the long term than cash savings accounts. The Treasury has pointed to the gap between average cash ISA rates and long-run equity market returns as evidence that many savers would be better served by investing rather than holding large sums in cash.

The UK has one of the highest proportions of household savings held in cash relative to comparable economies. According to figures cited during the Budget, a substantial share of annual cash ISA contributions come from higher-income households who use the accounts not primarily for short-term saving but as a tax shelter for cash that could be invested. The government's position is that the generous £20,000 cash ISA limit was enabling a pattern of saving that serves the tax advantage but does not reflect genuine short-term saving needs for many contributors.

Critics of the change, including industry bodies such as the Building Societies Association and campaigners for older savers, have argued that cash ISAs serve important purposes beyond pure return maximisation. They note that cash ISAs provide guaranteed protection of capital through FSCS coverage, that many savers use them for short-term goals where market exposure would be inappropriate, and that the reforms risk deterring lower-income savers who are not comfortable with investment risk from saving at all.

The over-65 exemption reflects recognition that older savers have different risk profiles and time horizons. A 70-year-old with significant savings in a cash ISA is in a fundamentally different position from a 35-year-old using one as a long-term wealth accumulation vehicle.

Understanding the 22% charge on cash interest in stocks and shares ISAs

The 22% tax charge on cash interest in stocks and shares ISAs closes a loophole that the government anticipated would be exploited if the cash ISA limit was cut without a corresponding restriction on non-cash ISAs.

Without this measure, a saver wishing to hold more than £12,000 in cash in a tax-efficient wrapper could simply open a stocks and shares ISA, deposit up to £20,000, leave the entire balance uninvested in the cash account, and earn interest tax-free. This would replicate the economic function of a cash ISA in a wrapper that still permits a £20,000 annual subscription, effectively making the cash ISA limit reduction meaningless for financially sophisticated savers.

The 22% rate is notable. The basic rate of income tax is 20%, making this a slightly punitive rate rather than a neutral one. The effect is that cash interest earned inside a stocks and shares ISA will be taxed more heavily than the same interest earned in a taxable savings account by a basic rate taxpayer. This creates a clear incentive to either deploy the cash into qualifying investments or hold it in a cash ISA within the new £12,000 limit rather than park it in a stocks and shares ISA wrapper.

The charge does not apply to dividends, capital gains, or returns from any qualifying investment asset held inside the stocks and shares ISA. These retain their existing tax-free treatment. A saver who invests their stocks and shares ISA balance in equity funds, for example, continues to receive dividends and capital growth entirely free of UK tax.

Transfer rules from April 2027

From 6 April 2027, under-65s will not be permitted to transfer funds from a stocks and shares ISA or innovative finance ISA into a cash ISA. This restriction is designed to prevent savers from subscribing £20,000 into a non-cash ISA and then immediately transferring the money across into a cash ISA, which would circumvent the reduced annual limit on cash ISA subscriptions.

A related restriction addresses a variation of the same strategy. The rules will prevent savers from subscribing £20,000 into a stocks and shares ISA and then using those funds to purchase investments that are wholly cash-like in economic terms, such as depositing the entire balance in a cash equivalent fund that behaves like a current account.

ISA transfers that are already in progress at the point the rules change on 6 April 2027 will need to be assessed against the new rules. The technical consultation that HMRC has announced will include transitional provisions covering transfers initiated before but completing after the effective date.

Savers who currently use ISA transfers as part of their annual allowance management, for example transferring old stocks and shares ISAs into cash ISAs when approaching retirement, will need to adjust their strategy before April 2027. Any such transfers should be completed before 5 April 2027 if they are to remain within the existing rules.

What the reforms mean for different types of saver

The practical impact of the reforms varies significantly depending on how a saver currently uses the ISA system.

For savers contributing less than £12,000 per year to a cash ISA, which represents the majority of cash ISA users, the reforms have no practical effect. The annual allowance they use remains unchanged. They will continue to benefit from tax-free interest on their savings in the same way as before April 2027.

For savers contributing between £12,000 and £20,000 per year to a cash ISA, the reforms reduce the amount that can be sheltered from tax each year. A saver who currently contributes £20,000 per year to a cash ISA from April 2027 can contribute only £12,000 to a cash ISA. The remaining £8,000 of their annual ISA allowance would need to be directed into a stocks and shares ISA or another qualifying non-cash wrapper, where it would be subject to the 22% charge on cash interest if left uninvested.

For savers aged 65 or over, the reforms make no difference. The full £20,000 cash ISA allowance is retained for this group, and the transfer restrictions and cash interest charge do not apply to their accounts.

For savers using stocks and shares ISAs primarily for investment, the reforms have minimal direct impact. The 22% cash interest charge applies only to uninvested cash. A saver who keeps their stocks and shares ISA fully or substantially invested in funds or equities will not be affected.

Timeline: what happens next

HMRC has confirmed that a technical consultation with financial services industry participants on the draft legislation will open shortly after the 23 June 2026 publication of the factsheet. The technical consultation is expected to cover the precise mechanics of the 22% charge, the definition of cash-like instruments for the purposes of the money market fund restriction, and transitional provisions for savers and platforms.

Regulations implementing the reforms are expected to be laid before Parliament in autumn 2026. This gives platforms, banks and building societies that operate ISA accounts approximately six months to update their systems before the April 2027 effective date. Industry participants including AJ Bell have flagged that this timeline is tight given the operational changes required.

The Lifetime ISA is the subject of a separate reform, with the government consulting on replacing it with a First-Time Buyer ISA. That change is on a parallel track and is not directly connected to the cash ISA limit reduction announced in the June 2026 factsheet.

Frequently asked questions

Does the cash ISA limit cut affect money already in a cash ISA?

No. The reforms apply only to new subscriptions made on or after 6 April 2027. Existing cash ISA balances accumulated before that date are unaffected. They continue to earn tax-free interest with no new charge or restriction.

Can I still open a cash ISA after April 2027?

Yes. Cash ISAs remain available and retain their tax-free status. The change is to the maximum amount that under-65s can contribute each tax year, not to the existence of the account type. The annual limit from April 2027 is £12,000 for under-65s.

What if I want to contribute more than £12,000 to a tax-efficient savings wrapper each year?

From April 2027, the remaining £8,000 of the overall £20,000 ISA allowance would need to be directed into a stocks and shares ISA or another qualifying non-cash wrapper. If that money is left in cash inside the stocks and shares ISA and earns interest, the 22% charge will apply to that interest.

Are over-65s affected?

No. Adults aged 65 and over retain the full £20,000 annual cash ISA subscription limit. The transfer restrictions and the cash interest charge in stocks and shares ISAs do not apply to this age group.

Does this affect Junior ISAs?

The reforms announced in the June 2026 factsheet relate to adult ISAs only. The Junior ISA annual subscription limit, currently £9,000, is subject to separate policy decisions and has not been changed by these reforms.

When does the technical consultation open?

HMRC has confirmed the technical consultation will open shortly after the 23 June 2026 factsheet publication. Draft legislation and the formal consultation document are expected to be published before the end of summer 2026, with regulations laid in autumn 2026.