From April 2027, investors holding uninvested cash in a stocks and shares Isa will face a 22% charge on any interest earned, according to new rules clarified by HM Revenue and Customs. This measure is part of a broader overhaul designed to enforce new limits on cash Isas and encourage more investment in the stock market.
What is changing?
The core structure of Isas remains the same: they are tax-efficient accounts for holding stocks, shares, or cash. A cash Isa functions like a savings account with tax-free interest, while a stocks and shares Isa can hold investments, uninvested cash, and money market funds. The annual subscription limit stays at £20,000 per adult per tax year.
Starting in the 2027-28 tax year, everyone under 65 will be limited to saving £12,000 per year in a cash Isa. Any additional savings must go into a non-Isa account or a stocks and shares Isa. Those aged 65 and over can still put the full £20,000 into a cash Isa.
Stocks and shares Isa changes
Currently, you can hold all £20,000 in cash within a stocks and shares Isa, though rates are typically lower than best-buy cash Isas. To prevent circumvention of the new cash Isa limit, HMRC will apply a 22% charge on interest from the cash component of a stocks and shares Isa, regardless of whether you have breached the £12,000 cash Isa limit. Over-65s also face this charge.
Additionally, from April 2027, under-65s will no longer be able to transfer money from a stocks and shares Isa to a cash Isa, blocking a loophole where investors could deposit £20,000 into a stocks and shares Isa and then quickly move it to a cash Isa. There is also a new rule: you cannot hold 100% of your stocks and shares Isa in money market funds, regardless of age.
Personal savings allowance cannot be used
Every year, basic-rate taxpayers have a £1,000 tax-free personal savings allowance, and higher-rate taxpayers have £500. HMRC has confirmed that this allowance cannot be used to shield cash Isa interest from the 22% charge. The charge is paid by the provider to HMRC at a flat 22% for all investors, regardless of their income tax band. This is lower than the 42% that higher-rate taxpayers would pay on interest earned outside an Isa from April 2027.
What does this mean for investors?
For those with only cash Isas, nothing changes. However, investors with stocks and shares Isas often hold uninvested cash temporarily. Claire Trott, head of advice at St James's Place, says: "Holding cash or cash-like assets within a stocks and shares Isa is often a normal part of the investment journey. Investors may temporarily hold cash while deciding where to invest, when switching investments, or while waiting for money to be reinvested."
If you currently hold a lot of cash in a stocks and shares Isa, you can still transfer it to a cash Isa before the rules change. After April 2027, you must either withdraw it or invest it to avoid the 22% charge. You can still invest in money market funds (as long as it's not 100% of your Isa) and other low-risk investments like government bonds, which remain tax-free.
