Chancellor Rachel Reeves is preparing to impose a 22 per cent charge on interest generated by cash holdings within stocks and shares ISAs from April 2027, under sweeping reforms to the savings system. The levy, which will apply to savers under the age of 65, forms part of broader “anti-circumvention rules” designed to prevent individuals from exploiting loopholes in the reformed ISA regime, according to sources with knowledge of Treasury discussions.
The new rate mirrors a pre-2014 framework, when a 20 per cent charge applied to cash interest held within stocks and shares accounts. HM Revenue and Customs (HMRC) had previously indicated that cash held within these accounts would attract a charge from April 2027, although the specific rate had remained unconfirmed until now. The 22 per cent figure has been aligned with the savings interest tax level, which is due to rise to that rate next April. Under the same savings tax reforms, the rates for basic-rate taxpayers will increase to 22 per cent, for higher-rate taxpayers to 42 per cent, and for additional-rate taxpayers to 47 per cent from April 2027.
Anti-Circumvention Rules and Their Impact on Savers
The government has stressed that these anti-circumvention measures are necessary to ensure that savers do not sidestep the new limits. From April 2027, the annual cash ISA allowance for under-65s will be reduced from £20,000 to £12,000, while savers aged 65 and over will retain the full £20,000 limit. The overall ISA allowance will remain at £20,000, meaning that for those under 65, the remaining £8,000 must be directed into “investment-type” ISAs such as stocks and shares ISAs or innovative finance ISAs — a split often referred to as the “12/8” rule.
To prevent savers from simply parking cash inside a stocks and shares ISA to avoid the lower cash ISA limit, the Treasury is introducing the 22 per cent charge on any interest earned on cash held in those accounts. Additionally, transfers from stocks and shares ISAs and innovative finance ISAs into cash ISAs will be banned for under-65s. Further restrictions will target “cash-like” investments held within stocks and shares ISAs. Products such as money market funds, which offer slightly stronger returns than traditional cash savings while carrying minimal risk, are expected to fall within the scope of the measures. These funds are frequently used by investors waiting for opportunities to purchase equities, but under the proposed rules they could be classified as “non-qualifying assets” if held in excessive proportions. The precise mechanics of how the restrictions would operate have not yet been confirmed by the Treasury.
For savers, the changes represent one of the biggest overhauls of the ISA system in more than a decade. Existing savings in cash ISAs will remain tax-free and unaffected — the new rules apply only to new contributions from April 2027 onwards. However, those who rely on cash ISAs for safety face a significant reduction in their tax-free shelter. Industry figures have suggested that some may consider alternative low-risk, tax-efficient vehicles such as Premium Bonds. Couples can effectively protect £24,000 in cash annually by utilising both their individual £12,000 limits. The “Bed & ISA” strategy — selling taxable investments and repurchasing them within a stocks and shares ISA — may help those looking to move funds into the investment portion of their allowance. The treatment of money market funds remains a key area of uncertainty, with their eligibility within stocks and shares ISAs now in doubt.
Rachel Vahey, of investment platform AJ Bell, said: “This really does need resolving if the Treasury wants to keep to the timeline of April 2027. It leaves us with very little time to make changes. At the moment, we’re looking at a very sharp implementation period and we really need some clarity from the Treasury as soon as we can get it.” Her comments come after months of discussions between government officials, investment firms, brokers and building societies over how to tackle attempts to avoid the reduced cash ISA threshold. Michael Summersgill, chief executive of AJ Bell, has described the reforms as “doomed to fail” in their goal of significantly boosting retail investment, arguing they introduce “horrendous complexity”. A survey by AJ Bell indicated that most people would opt for cash alternatives rather than investing. The retail investment industry has reportedly expressed “universal opposition” to the cut in the cash ISA allowance, and concerns have been raised that the complexity of the new rules will confuse consumers.
The investment industry has raised concerns about the limited timeframe available to implement the changes ahead of the April 2027 deadline. The details of the anti-circumvention measures are expected to be announced shortly, with platforms continuing to prepare their systems. HMRC has confirmed that the industry will be consulted on draft legislation to amend ISA regulations. Mandatory digital reporting for ISAs has been postponed to April 2028, a year after the reforms take effect, to ensure a smoother transition.
Treasury’s Rationale for the Overhaul
The Treasury has defended the reforms as part of a wider effort to encourage greater participation in equity markets. “We are reforming the cash Isa to encourage more people to invest in stocks and shares which have historically performed better than cash savings and we have retained the generous £20,000 tax-free limit,” a spokesperson said. The Chancellor first announced the reforms in her 2025 Budget last year, presenting the measures as part of efforts to boost investment into British businesses and channel more money into the UK economy. The government also plans to consult on a new, simpler ISA product for first-time buyers, which will replace the Lifetime ISA. The overall annual ISA allowance of £20,000 will remain frozen until April 2031.
