Savers who hold uninvested cash inside a stocks and shares ISA will face a 22 per cent charge on any interest it earns from April 2027, the Treasury has confirmed as part of a sweeping overhaul of the ISA regime. The flat-rate levy will apply to interest or alternative finance returns on cash held within any non-cash ISA, covering money that has not yet been invested as well as dividends waiting to be deployed. The measure is designed to stop individuals using stocks and shares ISAs as long-term tax-free savings accounts, a practice the government believes undermines the purpose of the investment wrapper.
New charge on cash in stocks and shares ISAs
The 22 per cent charge will be deducted regardless of the account holder’s income tax band — basic-rate, higher-rate, or even non-taxpayers will all be subject to the same rate. It marks a return of a similar levy that was scrapped by HM Revenue & Customs in 2014, when a 20 per cent charge on interest from cash in investment ISAs was removed. The Treasury has said it will publish a technical consultation setting out exactly how the new charge will operate in practice.
Several major investment platforms — including Bestinvest, AJ Bell, interactive investor, Fidelity and Hargreaves Lansdown — currently pay interest on cash held within stocks and shares ISAs. Although the rates are not particularly competitive, the arrangements allow investors to keep money inside the tax wrapper while deciding how to deploy it or while awaiting dividend payments. It remains unclear whether platforms will stop paying interest on cash holdings or whether investors will simply have to account for the 22 per cent deduction. An AJ Bell spokesperson declined to comment on whether the platform would change its policy. Hargreaves Lansdown and interactive investor were contacted by MoneyWeek for comment but did not respond.
Jason Hollands, managing director of Bestinvest, described the anti-circumvention measures as a “disproportionate response to a problem that may never meaningfully materialise”. He added that investors would “need to weigh up the relative difference in returns on a money market fund minus any platform fees, versus holding cash and having the 22 per cent charge deducted”.
The Treasury has also confirmed that money market funds will be permitted within stocks and shares ISAs, provided they do not constitute 100 per cent of the investments in the portfolio. That means an investor could, for example, hold 99 per cent of their non-cash portfolio in money market funds and 1 per cent in UK equities and remain compliant. Rachel Vahey, head of public policy at AJ Bell, explained that the rule would deem a portfolio invalid if cash-like assets — defined solely as money market funds — made up the entirety of the investment holdings. “It also means they could hold 50 per cent of their portfolio in cash, but if the remaining 50 per cent was held in money market funds that wouldn’t be allowed,” she said. “Whereas if they held 49 per cent in money market funds and 1 per cent in UK equities, this would be permitted under the rules.” Common investments such as individual shares, funds, investment trusts, exchange-traded funds, and corporate and government bonds — including UK gilts — will not be treated as cash-like assets.
James Carter, head of platform policy at Fidelity International, welcomed the inclusion of cash-like investments within non-cash ISAs. “These products are genuine investment products, holding short-term government and high-quality debt, and form a valued part of many balanced portfolios,” he said. “Removing them from the stocks and shares ISA framework would have undermined the government’s objective of encouraging more people to invest, by giving customers a cliff edge choice between staying in cash or moving directly into higher-risk, more complex products.”
Cash ISA allowance slashed for under-65s
Alongside the interest charge, the Treasury will reduce the annual cash ISA allowance from £20,000 to £12,000 for savers under the age of 65 from April 2027. The overall ISA subscription limit will remain frozen at £20,000 until 2030, meaning that individuals under 65 must invest the remaining £8,000 of their allowance into stocks and shares ISAs or other investing-style accounts if they wish to use the full tax-free entitlement. Savers aged 65 and over will continue to benefit from the higher cash ISA limit of £20,000 per year.
Restrictions will also apply to transfers. From April 2027, transfers from stocks and shares ISAs into cash ISAs will no longer be permitted for individuals under 65, although transfers in the opposite direction — from cash ISAs into stocks and shares ISAs — will remain allowed. For those aged 65 and over, the transfer restrictions will be disapplied, meaning they can move money freely between account types. However, the 22 per cent charge on cash interest and the prohibition on holding 100 per cent of a portfolio in money market funds will still apply to older savers.
The Treasury is also consulting on a new first-time buyer ISA intended to replace the Lifetime ISA. The proposed product will be available to first-time buyers aged 18 and over, can hold cash or investments, and will carry no upper age limit. The government bonus will be paid at the point of house purchase rather than annually, and there will be no withdrawal penalty. The reforms are part of a wider government strategy to develop a retail investment culture in the UK, with the timing coinciding with increases in income tax rates on savings and dividends held outside ISA wrappers from April 2027.
Industry warns of unintended consequences
Industry figures have broadly criticised the reforms as draconian and likely to deter rather than encourage investment. Greg Davies, head of behavioural finance at Oxford Risk, warned that the measures risk backfiring. “Getting people invested is an inherently behavioural challenge,” he said. “You do not encourage nervous savers into investing by making the first step feel more complicated, more punitive and harder to reverse. Adding tax charges and transfer restrictions to an already confusing ISA system sends precisely the wrong behavioural signal. For many would-be investors, this will not create confident investors. It will create more hesitation, more disengagement, and more people doing nothing.”
Rachel Vahey at AJ Bell described the changes as “increasingly complex” and “riddled with unintended consequences”. She suggested that many people would simply keep their money in cash ISAs rather than navigate the new rules. “The new rules mean a charge of 22 per cent will be applied to interest paid on cash in investment ISAs,” she noted. “This is a flat-rate charge, meaning the same rate applies whether the ISA account holder is a basic rate taxpayer, higher-rate taxpayer, or indeed doesn’t pay any income tax.”
Other critics labelled the measures “draconian anti-avoidance provisions” that add further complexity to a system already considered by many savers to be bewildering. James Carter at Fidelity said his firm had “consistently welcomed the government’s recent focus on encouraging more people to invest”, but added that the industry awaited the technical consultation for the detail needed to implement the changes.
Jason Hollands of Bestinvest summed up the mood among many in the sector, describing the anti-circumvention rules as a “disproportionate response to a problem that may never meaningfully materialise”.
