HMRC has confirmed a major shake-up to the ISA landscape, including a 22% tax charge on interest earned from cash held in stocks and shares ISAs from April 2027.
HMRC confirms 22% tax charge on cash held in stocks and shares ISAs
The move is designed to stop savers using investment ISAs as a workaround once the cash ISA allowance for under-65s is reduced to £12,000.
The new rules will still allow investors to hold cash inside a stocks and shares ISA, but any interest paid on that cash will be taxed at 22%.
HMRC says the changes are intended to encourage more retail investment while preventing people from parking long-term cash in non-cash ISAs and keeping the interest tax-free.
What is changing
Under the revised rules, the cash ISA allowance for people under 65 will fall from £20,000 to £12,000, starting on 6 April 2027.
The limit for stocks and shares ISAs and innovative finance ISAs will remain at £20,000, and the overall ISA allowance will stay at £20,000.
HMRC also said transfers from non-cash ISAs into cash ISAs will not be allowed, although transfers from cash ISAs into non-cash ISAs will still be permitted.
For savers aged 65 and over, the cash ISA allowance will remain at £20,000, with the higher limit applying from the start of the tax year in which they turn 65.
Why HMRC is making changes
The government says the reforms are meant to protect the new lower cash ISA limit and reduce opportunities for circumvention.
In practice, that means stopping savers from putting money into a stocks and shares ISA and leaving it in cash for the interest tax benefit, or moving cash in ways that would bypass the new cap.
HMRC’s factsheet says the 22% charge will apply to “interest or alternative finance return” on cash held in a non-cash ISA.
It adds that cash-like assets will only be allowed where they are part of a diversified portfolio, and that 100% cash-like holdings in non-cash ISAs will not qualify.
What savers should know
For most investors, the headline is that stocks and shares ISA investments themselves are still tax-free.
The new charge applies only to cash balances sitting inside the account and earning interest, not to shares, funds, investment trusts, ETFs or government bonds held in the ISA.
That means the rule mainly affects people who use a stocks and shares ISA as a temporary cash parking place, rather than as a long-term investment wrapper.
Anyone who regularly holds large cash balances inside an investment ISA may need to review their strategy before the changes take effect.
