HM Revenue and Customs (HMRC) has confirmed a new 22% tax charge on interest earned on cash held within stocks and shares ISAs, set to take effect from April 6, 2027. The measure, first announced by Chancellor Rachel Reeves in the November 2025 Budget, aims to prevent savers from circumventing the reduced Cash ISA allowance by holding cash in non-cash ISAs.
New Rules Target Cash in Non-Cash ISAs
From April 2027, the annual Cash ISA allowance for under-65s will be reduced to £12,000, while the limit for stocks and shares and innovative finance ISAs will remain at £20,000. The over-65s will continue to enjoy a £20,000 Cash ISA allowance. HMRC's factsheet states that rules will be introduced to ensure the policy achieves its objective of encouraging an investment culture.
The new rules aim to prevent individuals from subscribing up to £20,000 in cash within a non-Cash ISA and leaving it there long-term to earn tax-free interest. They also target those who transfer funds from a non-Cash ISA to a Cash ISA or use the funds to purchase “wholly cash-like” investments. A flat-rate charge of 22% will apply on interest or alternative finance return paid on cash held within a non-Cash ISA.
Industry Reactions Mixed
Simon Harrington, head of public affairs at PIMFA (Personal Investment Management and Financial Advice Association), expressed scepticism: “We remain sceptical that these changes will have any real effect on consumer investment behaviour and fear they will do the opposite. Far from encouraging take up, they risk making the stocks and shares ISA, the very wrapper the Government wants people to use, less attractive.”
Tom Riley, Nationwide Building Society’s group director of retail products, offered a more positive view: “Ensuring a level playing field between cash and non-Cash ISAs is vital to maintaining a strong savings market. We welcome the Government’s introduction of controls to support its ambition to get more people investing, while ensuring over-65s can rely on the full Cash ISA allowance.”
Concerns Over Complexity
Jeremy Cox, head of strategy at Coventry Building Society, criticised the changes: “We’re moving away from a fair and straightforward ISA system, where all adults can save or invest up to £20,000 tax-free each year, towards a more complex and confusing set of rules that will feel unfair to many consumers.” Andrew Prosser, head of Investments at InvestEngine, echoed concerns: “Our worry is that instead of encouraging investing, this could end up putting people off. If stocks and shares ISAs become more complex and less straightforward, some savers may just disengage altogether.”
Andrew Gall, head of savings at the Building Societies Association (BSA), emphasised the need for clarity: “It is vital that savers have clear information and sufficient time to understand how the changes will affect them and the choices available to them from April 2027. Building societies also need certainty on the final rules so they can update systems and communicate with their members well ahead of implementation.”
Next Steps
HMRC has announced that a technical consultation with industry on the draft legislation will commence shortly, with regulations to be laid in the autumn. The new rules are scheduled to come into force on April 6, 2027.
