Individual Savings Accounts (ISAs) have been one of the simplest and most tax-efficient ways to save and invest your wealth for some time now.
Whether you use a Cash ISA for savings or a Stocks and Shares ISA for your investments, you can typically shelter your wealth from Income Tax, Capital Gains Tax, and Dividend Tax.
However, the government has announced several changes to how ISAs will work from April 2027.
One of these is a new 22% charge on interest earned from cash held inside non-Cash ISAs, including Stocks and Shares ISAs.
At first glance, this might sound as though Stocks and Shares ISAs are being taxed more broadly, but this isn’t necessarily the case.
The charge applies to interest earned on cash held inside the account, not to investment growth from shares, funds, or investments.
Continue reading to find out exactly how the new 22% charge will work, and what you can do to prepare for it.
The 22% charge applies to interest earned on cash inside non-Cash ISAs
From 6 April 2027, you’ll still be able to hold cash inside a Stocks and Shares ISA. Yet, if you earn any interest on that cash, it could be subject to a flat 22% charge.
This will be paid to HMRC by ISA managers, meaning you shouldn’t need to declare the interest yourself through Self Assessment.
The Personal Savings Allowance will also not apply to this interest.
Importantly, the charge won’t apply to the cash balance itself. For instance, if you hold £10,000 in your Stocks and Shares ISA, the 22% charge isn’t applied to the full £10,000.
Instead, it would apply to the interest that cash earns.
So, if your £10,000 cash generated £400 of interest over the year, a 22% charge would reduce this by £88, leaving you with £312.
While this might not seem like a significant difference over one year, the effects might seem more noticeable if you hold larger balances or leave cash uninvested for several years.
The Cash ISA allowance will also fall to £12,000 for under-65s
It’s also important to note that, from 6 April 2027, the annual Cash ISA limit for under-65s will fall from £20,000 to £12,000.
The overall ISA allowance will remain at £20,000. This means that, if you’re under 65, you could still contribute £20,000 across your ISAs in a single tax year, but no more than £12,000 of this could be paid into your Cash ISA.
You could use the remaining £8,000 for other forms of ISA, such as a Stocks and Shares ISA or Lifetime ISA.
However, the annual Cash ISA limit will remain at £20,000 if you’re over 65, and it will apply from the start of the tax year in which you turn 65.
Ultimately, the new 22% charge is designed to prevent you from avoiding the reduced Cash ISA limit by paying the full £20,000 into your Stocks and Shares ISA and simply holding it in cash.
Any transfers you make from non-Cash ISAs into your Cash ISA might also be forbidden from April 2027.
This means that if you hold money in a Stocks and Shares ISA, you will typically not be able to transfer it into a Cash ISA at a later date.
However, transfers from Cash ISAs into non-Cash ISAs will still be allowed.
This might affect how you structure your savings and investments in the future if you regularly move money between your ISAs.
There are ways to prepare for the upcoming ISA changes
The upcoming reforms don’t mean ISAs are no longer valuable, but you may need to review how you use them. Read on for three steps to consider.
1. Check whether cash has built up in your Stocks and Shares ISA
You may wish to hold cash in your Stocks and Shares ISA for several reasons. For example, you might have:
- Recently sold investments
- Paid in a new contribution
- Received dividends
- Held cash while waiting to invest.
However, if this cash has built up unintentionally, the new 22% charge could reduce the interest you receive from April 2027.
As such, you may want to take the time now to review your ISAs to help you understand whether your cash is there for a purpose or is simply sitting idle.
2. Reassess your need for short-, medium-, and long-term cash
If you need money over the short term, cash can offer stability and flexibility. For instance, you may want to hold cash for an upcoming planned expense or an emergency fund.
However, if your money is intended for long-term growth, holding too much in cash could limit its potential. This is due to the fact that investments have historically outperformed cash savings.
According to Barclays, if you had invested £20,000 in 2006, this would have risen to:
- £123,660 in 2026 if you had invested in global equities
- £25,590 if you’d held it as cash savings.
Inflation can also erode the real-term value of your cash over time if the interest you earn doesn’t keep pace with rising costs.
So, it’s worth thinking about when you’re likely to need the money before deciding whether to hold it in cash or invest it.
3. Work with a financial planner
Even though ISA rules are changing, this doesn’t necessarily mean you should make rushed decisions.
A financial planner could help you review how you currently use your ISA allowances and identify whether your strategy still suits your goals.
For instance, your Engage Wealth Management financial planner could help you:
- Understand how much cash you hold inside your Stocks and Shares ISA
- Decide whether that cash should stay where it is, move somewhere else, or be invested
- Review how the lower Cash ISA limit could affect your plans
- Consider whether new rules change how you save for short-, medium-, or long-term goals
- Ensure your investments remain aligned with your tolerance for risk.
This could help you adapt to the new rules without taking on unnecessary risk or losing sight of your long-term goals.
Please email us at [email protected] or call 01273 076 587 to find out more.
Please note
This article is for general information only and does not constitute advice. The information is aimed at individuals only.
All information is correct at the time of writing and is subject to change in the future.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
The Financial Conduct Authority does not regulate tax planning.
