HM Revenue and Customs has clarified new rules for Individual Savings Accounts (Isas) that will take effect from April 2027, raising concerns among investors about potential tax liabilities on cash holdings within stocks and shares Isas. Under the changes, interest earned on uninvested cash in a stocks and shares Isa will be subject to a 22% charge, regardless of the investor's age.
What is changing for cash Isas?
From the 2027-28 tax year, individuals under 65 will face a reduced annual limit of £12,000 for cash Isa subscriptions, down from the current overall Isa limit of £20,000. Those aged 65 and over can still invest the full £20,000 in a cash Isa. The government aims to encourage more people to invest in stocks and shares rather than holding cash.
Stocks and shares Isa changes
Currently, all growth and returns in a stocks and shares Isa are tax-free. Under the new rules, any interest earned on uninvested cash held within the account will be taxed at 22%, effective from April 2027. This charge applies even if the investor has not exceeded the new cash Isa limit. Additionally, transferring money from a stocks and shares Isa to a cash Isa will no longer be allowed for those under 65, preventing circumvention of the cash limit.
The rules also limit holdings in money market funds within a stocks and shares Isa. Investors cannot hold 100% of their Isa in such low-risk products, regardless of age.
Impact on personal savings allowance
HMRC has confirmed that the personal savings allowance—£1,000 for basic-rate taxpayers and £500 for higher-rate taxpayers—cannot be used to offset the 22% charge. The charge will be deducted by the provider and paid to HMRC. For higher-rate taxpayers, this rate is lower than the 42% tax they would pay on savings interest outside an Isa from April 2027.
What this means for investors
Claire Trott, head of advice at St James’s Place, noted: “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.”
Investors currently holding significant cash in a stocks and shares Isa can still transfer it to a cash Isa before the rules change. After April 2027, they must either withdraw the cash or invest it to avoid the tax. Money market funds remain an option, as long as they do not constitute the entire Isa. Returns on other low-risk investments, such as government bonds, will remain tax-free.
