Author:
Ella Boyd
Financial Commentator,
Saltus Asset Management Team
Reviewed by: Megan Jenkins, Chartered Financial Planner, Saltus Asset Management Team
The government has confirmed the introduction of a 22% charge on interest earned on cash held within non-cash ISAs. The measure is expected to take effect from 6 April 2027 following consultation.[1]
The change represents a departure from the current ISA framework, where cash held within non-cash ISAs can generate interest free from tax. Going forward, any interest or equivalent return (e.g. Sharia-compliant returns) on cash balances held within non-cash ISAs will be subject to a flat 22% charge. Subsequently, this introduces a new cost to what has previously been considered a flexible feature of the wrapper.
A policy shift towards investment over cash
The introduction of the 22% charge forms part of a wider effort by the government to steer behaviour within the ISA regime. While ISAs have long been positioned as a tax-efficient way to save and invest, policymakers are now drawing a firmer distinction between the two.
By applying a tax charge to cash within investment ISAs, the government is seeking to discourage the use of these accounts as a de facto cash shelter. The measure aligns with the broader objective of encouraging greater participation in long term investment markets, which is seen as supporting both individual wealth accumulation and economic growth.
This marks a partial return to the approach taken before 2014, when interest earned on cash within a Stocks and Shares ISA was taxed at 20%. That charge was removed as part of earlier simplification reforms, but the reintroduction of a levy, now at 22%, signals a renewed focus on targeting perceived misuse of the system.
How the new rules will work
Under the proposed framework, any interest or return generated on cash held within Stocks and Shares ISAs and other non-cash ISA structures will be subject to a 22% charge.[2] This applies regardless of whether the cash is held temporarily or as part of a longer term allocation.
The charge sits alongside a number of additional ISA reforms designed to reinforce the same policy direction. These include restrictions on how ISAs can be structured and used:
- Portfolios made up entirely of cash or cash-like assets, will not qualify as valid investments within non-cash ISAs. Money market funds, will not be subject to the 22% tax charge, as long as they do not comprise 100% of the investments in a non-cash ISA
- Transfers from non-cash ISAs into Cash ISAs will be prohibited for individuals under the age of 65
- The annual Cash ISA allowance will be reduced from £20,000 to £12,000 for those under 65, while the full £20,000 allowance will remain available for non-cash ISAs
The government has made clear that these measures are intended to prevent investors from circumventing the lower Cash ISA limit by holding large amounts of cash within investment ISAs.
Practical impact on ISA usage
In practice, the 22% charge is likely to have an impact on how investors use Stocks and Shares ISAs, particularly when it comes to managing short term liquidity.
It has been common for investors to hold cash within these accounts on a temporary basis. This may occur when funds are waiting to be invested, during portfolio rebalancing, or in periods of heightened market uncertainty. Under the current rules, this flexibility does not come with a tax cost. From April 2027, however, any interest generated during these periods will be reduced by the 22% charge.[3]
The effect is to introduce a form of tax drag that may become more noticeable in higher interest rate environments. As cash yields increase, the relative cost of holding surplus cash within the ISA also rises.
The prohibition on transferring funds into Cash ISAs further limits flexibility. Once assets are held within a Stocks and Shares ISA, the ability to move into a cash-based ISA structure is restricted for those under 65. This places greater emphasis on planning how ISA allowances are allocated from the outset, rather than relying on the ability to adjust positioning later.
Looking ahead to implementation
With the new rules not expected to take effect until April 2027, there is a period during which further detail will be clarified through consultation. However, the overall direction of travel is already clear.
Non-cash ISAs are being repositioned more firmly as vehicles for long term investment rather than flexible accounts that can accommodate both investing and cash management. The introduction of the 22% charge reinforces that distinction and reduces the incentives to hold material cash balances within the wrapper.
As implementation approaches, the changes are likely to prompt a review of how ISAs are used alongside other tax-efficient structures. While the core benefits of ISAs remain in place, particularly the tax-free treatment of investment growth and income, the role of cash within these accounts is being redefined. If you think this might affect you, seeking financial advice is recommended.
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All authors have considerable industry expertise and specific knowledge on any given topic. All pieces are reviewed by an additional qualified financial specialist to ensure objectivity and accuracy to the best of our ability. All reviewer’s qualifications are from leading industry bodies. Where possible we use primary sources to support our work. These can include white papers, government sources and data, original reports and interviews or articles from other industry experts. We also reference research from other reputable financial planning and investment management firms where appropriate.