HMRC has confirmed that interest earned on cash held inside stocks and shares ISAs and innovative finance ISAs will face a 22% charge from April 2027, closing a route savers might otherwise have used to bypass the reduced cash ISA allowance.
The charge will apply to interest generated by uninvested cash held within accounts classed as non-cash ISAs. Shares, investment funds and other qualifying assets held inside a stocks and shares ISA will retain their existing tax treatment, meaning the reform does not introduce a general tax on investment gains or dividends within the wrapper.
Investors commonly leave some cash inside investment accounts while waiting to purchase assets, receiving dividend payments or ensuring sufficient funds are available to cover platform fees. Interest paid on those balances is currently protected by the ISA wrapper. Once the new rules take effect, providers will be required to apply the 22% charge to that interest.
The measure forms part of the government’s attempt to prevent savers from using stocks and shares ISAs as substitute cash accounts after the annual cash ISA subscription limit is cut. From 6 April 2027, people under 65 will be able to place up to £12,000 a year into cash ISAs, down from the current £20,000. The overall annual ISA allowance will remain £20,000, while savers aged 65 and over will retain the full £20,000 cash ISA limit. The government is also tightening the movement of money between different ISA types. Savers under 65 will no longer be allowed to transfer funds from stocks and shares or innovative finance ISAs into cash ISAs. Transfers in the opposite direction will still be permitted, preserving the government’s intended route from cash saving into investment.
Money-market funds will face another restriction. Investors will still be able to hold them inside non-cash ISAs, but they will no longer be permitted to allocate the entire account to these low-risk, cash-like investments. The precise minimum proportion that must be held elsewhere has not yet been published, with further operational details expected in HMRC’s next Tax Free Savings newsletter. The package creates a more complicated boundary between saving and investing. Someone who temporarily sells investments during volatile markets could find that interest earned while the proceeds remain in cash is subject to the charge. Platforms will also need systems capable of identifying eligible interest, deducting the correct amount and explaining the treatment clearly to customers.
AJ Bell head of public policy Rachel Vahey has argued that the reforms could reduce flexibility and discourage potential investors by making the ISA system harder to understand. The concern is that people who are nervous about investing may prefer to remain entirely in cash rather than open a stocks and shares ISA carrying unfamiliar restrictions and tax calculations.
Chancellor Rachel Reeves has positioned the ISA reforms as part of a drive to encourage retail investment and direct more household savings towards companies and capital markets. The policy relies on financial incentives and restrictions to make long-term investing more attractive than leaving large balances in cash.
Whether the approach changes saver behaviour will depend partly on how providers implement the rules. Clear treatment of small operational cash balances, platform fees, recently sold investments and money awaiting reinvestment will be essential. Without practical exemptions or straightforward guidance, the 22% charge could affect ordinary account management as well as people deliberately using investment ISAs to hold cash.
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