HM Revenue and Customs (HMRC) has announced a significant change affecting anyone holding cash in a stocks and shares ISA, set to take effect from April 2027. The government department will introduce a 22% levy on interest earned from cash held within these accounts, a move designed to prevent savers from bypassing new cash ISA limit rules.
New Levy and Allowance Changes
From April 2027, the annual cash ISA allowance will be reduced to £12,000, while the limit for stocks and shares and innovative finance ISAs (non-cash ISAs) will remain at £20,000. However, individuals aged 65 and over will retain the full £20,000 cash ISA allowance. The 22% flat-rate charge on interest or alternative finance return on cash held in non-cash ISAs aims to ensure a level playing field between cash and non-cash ISAs, according to HMRC.
Measures to Prevent Avoidance
An HMRC factsheet outlines new rules to prevent savers from subscribing up to £20,000 in cash within a non-cash ISA and leaving it there long-term to earn tax-free interest. The rules also target those who subscribe £20,000 to a non-cash ISA and then transfer those funds to a cash ISA, or use the funds to purchase wholly cash-like investments. These measures are intended to support the government's ambition to foster an investment culture.
Industry Reactions
Simon Harrington, head of public affairs at PIMFA (Personal Investment Management and Financial Advice Association), expressed scepticism about the changes. "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," he said.
Tom Riley, Nationwide Building Society’s group director of retail products, welcomed the move. "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," he stated.
Consultation and Implementation Timeline
HMRC will begin a technical consultation with industry on the draft legislation shortly, with regulations to be laid in the autumn. The new rules will come into force from April 6, 2027. 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," he said.
New First-Home ISA Product
The government is also consulting on a new, simpler ISA product to support first-time home buyers, which will replace the Lifetime ISA. Jasvinder Gakhal, chief executive, money at Skipton Building Society, commented on the consultation. "Skipton Building Society was the first provider in the UK to offer the cash Lifetime ISA in 2017 and, today, remains one of the largest Lisa providers with over 160,000 Lisa savers. The Lisa has helped over 314,000 first-time buyers secure a home of their own, showing how targeted savings support can unlock affordability. This consultation is a step in the right direction. Removing the withdrawal penalty, scrapping the upper age limit and reviewing the price cap are all the right calls to create a simpler, more flexible product that works for modern savers. But the detail now matters. The Skipton Group home affordability index shows the average first-time buyer home will exceed the current cap in around 10% of local authority areas across Great Britain by the end of 2027. The new scheme must keep pace with the market. We look forward to working with Government to ensure the new Isa delivers for first-time buyers and our members, including those with existing Lisa savings," he said.
