HMRC has confirmed that interest earned on savings in stocks and shares ISAs and new finance ISAs will face a 22% charge from April 2027, closing the loophole savings that could be used to bypass the reduced ISA allowance.
The charge will apply to interest earned on uninvested money held within accounts deemed to be non-cash ISAs. Shares, investment funds and other suitable assets held within a stocks and shares ISA will retain their existing tax treatment, meaning that the conversion does not trigger normal tax on investment gains or dividends within the portfolio.
Investors often leave some money inside investment accounts while they wait to buy assets, receive dividend payments or make sure enough money is available to cover platform payments. Interest paid on those balances is currently protected by an ISA policy. Once the new rules come into effect, providers will have to apply a 22% charge on that interest.
The measure is part of the government's attempt to prevent savers from using stocks and shares ISAs as portable cash accounts after the annual cash ISA subscription limit is lifted. From 6 April 2027, under-65s will be able to put up to £12,000 a year into cash ISAs, down from the current £20,000. The annual ISA allowance will remain at £20,000, while those aged 65 and over will retain the full ISA limit of £20,000. The government is also tightening the flow of money between different types of ISA. Savers under the age of 65 will no longer be allowed to transfer funds from stocks and shares or roll over new financial ISAs into cash ISAs. Transfers will still be allowed, which preserves the government's intended route from saving cash to investment.
Money market funds will face another limitation. Investors will still be able to hold them within non-cash ISAs, but they will no longer be allowed to dedicate the entire account to these low-risk funds, such as cash. The exact minimum amount to be kept elsewhere has not yet been published, with further operational details expected in HMRC's next Tax Free Savings newsletter. The package creates a very difficult boundary between saving and investing. Someone who sells an investment temporarily during fluctuating markets may find that the interest earned while the proceeds remain in cash is subject to a charge. Platforms will need systems that can identify the right interest, charge the right price and explain the treatment clearly to customers.
AJ Bell head of public policy Rachel Vahey argued that the changes 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 stay entirely in cash instead of opening a shares and shares ISA which carries unusual limits and tax calculations.
Chancellor Rachel Reeves has set out the ISA reforms as part of a drive to encourage retail investment and direct more household savings to companies and capital markets. The policy relies on financial benefits and restrictions to make long-term investments more attractive than leaving large cash balances.
How to change saver behavior will depend in part on how providers implement the rules. Clear management of small operating cash balances, field funds, newly sold investments and cash awaiting reinvestment will be essential. Without practical exemptions or specific guidance, the 22% charge is likely to affect ordinary account managers and people who deliberately use investment ISAs to hold cash.
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