CEO, The Savvy Investor Limited · Investment Educator
Published: 25 June 2026 · Reading time: 6 minutes
⚠️ Important: This article provides educational information for UK residents and is not personalised financial advice. It explains a government reform that is being consulted on and is not yet law. ISA rules are based on current 2026/27 legislation and announced proposals that may change. Consider speaking to an FCA-authorised adviser before making decisions about your savings.
There is a quiet detail in the 2027 ISA reform that has been overshadowed by the headline £12,000 cash ISA cap, and it matters to a group of savers the cap alone would miss. From 6 April 2027, a flat 22% charge will apply to interest earned on uninvested cash held inside a stocks and shares ISA (and an innovative finance ISA). In plain terms: if you have been using an investment ISA as a high-interest cash account, that stops being tax-free. Here is exactly what has been announced, who it hits, the one important exception, and what to do about it before April 2027.
The short version
- From 6 April 2027, a flat 22% charge applies to interest (and Sharia-compliant alternative-finance returns) on cash held inside a non-cash ISA, meaning a stocks and shares ISA or an innovative finance ISA.
- It closes a workaround the £12,000 cash ISA cap would otherwise leave open: parking cash in an investment ISA to keep it tax-free while dodging the cash limit.
- The exception: money market funds are the only permitted “cash-like” holding, and an ISA cannot be 100% cash-like. A money market fund inside a stocks and shares ISA is not caught by the charge.
- It applies to cash in investment ISAs regardless of your age. The separate £12,000 cash ISA cap is the under-65 rule; the 22% charge is not age-limited.
- The 22% rate is not a coincidence: the basic rate of savings tax also rises to 22% from April 2027, so the charge broadly neutralises the tax-free benefit of holding cash in an investment ISA.
- The government will consult on the draft legislation, and the measure is announced to take effect from 6 April 2027, alongside the rest of the ISA reform.
What the government announced
The 2027 ISA reform has three moving parts. The November 2025 Autumn Budget announced the headline change: from 6 April 2027 the cash ISA allowance for under-65s drops from £20,000 to £12,000, with the remaining £8,000 of the £20,000 ISA allowance reserved for investment-type ISAs. In June 2026 the government published the detailed “anti-circumvention” rules that sit underneath that headline, and this is where the 22% cash charge appears.
The factsheet is specific. It sets out “a flat-rate charge (22%) on any interest or alternative finance return paid on cash held within a non-cash ISA”, taking effect from 6 April 2027. The government will consult with industry on the draft legislation before it is finalised. The aim, stated plainly, is the same as the cap itself: to stop investment ISAs being used as cash shelters and to nudge long-term savings toward investments.
Why the charge exists
Without it, the £12,000 cash ISA cap would have an obvious hole. A saver who wanted to keep £20,000 of cash entirely tax-free could simply open a stocks and shares ISA, leave the money sitting in the account’s cash facility earning interest, and never buy a single investment. The cap on the cash ISA would be sidestepped, and the Treasury’s nudge toward investing would achieve nothing. The transfer ban already announced (under-65s cannot move money from a stocks and shares ISA into a cash ISA from April 2027) closes one route; the 22% charge closes the other, the one where the cash never leaves the investment wrapper in the first place.
Who pays it, and the money market fund exception
The charge is narrower than the headlines suggest, and the detail matters.
- It hits uninvested cash, not your investments. Shares, funds, ETFs, bonds and other genuine investments inside a stocks and shares ISA are completely unaffected. The charge applies only to interest on cash that is sitting in the account.
- It applies regardless of age. Unlike the £12,000 cash ISA cap, which only affects under-65s, the 22% cash charge is not age-limited. An over-65 who keeps the full £20,000 cash ISA allowance still faces the charge on any cash they leave inside an investment ISA.
- Money market funds are the exception. The rules define money market funds as the only permitted “cash-like” holding, and they are not treated as cash for the purposes of the charge. The one limit: an ISA cannot be 100% cash-like, so you cannot fill an entire stocks and shares ISA with a money market fund and call it done. Used as part of a wider portfolio, though, a money market fund is the compliant way to hold a low-risk, near-cash position inside an investment ISA.
- It covers alternative-finance returns too. Sharia-compliant returns paid on cash held in a non-cash ISA are treated the same way as interest.
A worked example
Suppose you hold £40,000 of uninvested cash inside a stocks and shares ISA, earning 4.5% interest. That is £1,800 of interest in a year. Under the new rule, the 22% charge takes £396 of it, leaving you £1,404. Before April 2027, all £1,800 would have been tax-free. The charge does not wipe out the return, but it removes most of the reason you were holding the cash in an investment ISA rather than a cash ISA or an ordinary savings account in the first place.
How it fits the wider 2027 ISA reform
The 22% charge is the third piece of a connected set of changes that all land on 6 April 2027. Seen together, they tell a single story: cash held outside an ISA is taxed more, cash held inside an investment ISA is now charged, and the cash ISA itself is capped for under-65s. The wrapper that protects cash is being narrowed from several directions at once.
| Change from 6 April 2027 | What it does | Who it affects |
|---|---|---|
| Cash ISA cap drops to £12,000 | Under-65s can put only £12,000 of the £20,000 allowance into a cash ISA | Under-65s (over-65s keep £20,000) |
| Transfer ban | Under-65s cannot transfer from a stocks and shares ISA into a cash ISA | Under-65s |
| 22% charge on ISA cash interest | A flat 22% charge on interest on uninvested cash in a non-cash ISA | Anyone holding cash in a stocks and shares or innovative finance ISA, any age |
| Savings tax up 2 points | Tax on savings interest outside an ISA rises to 22% / 42% / 47% above the Personal Savings Allowance | Savers with taxable interest above their allowance |
The neat detail is the rate. The flat charge is set at 22%, exactly the new basic rate of savings tax from the same date. For a basic-rate saver, holding cash in an investment ISA at a 22% charge is now broadly the same as holding it in a taxable account, so the ISA shelter on that cash effectively disappears. Higher and additional-rate savers, who will pay 42% or 47% on taxable interest, may still find the flat 22% charge less painful than the alternative, but the simpler conclusion holds for almost everyone: an investment ISA is no longer the place to park cash. For the full picture of the cap and the savings-tax rise, see our guide to the £12,000 cash ISA cap.
What to do before April 2027
- Match the wrapper to the job. Cash belongs in a cash ISA (up to £12,000 a year for under-65s) or an ordinary savings account; an investment ISA is for investments. If you have been using a stocks and shares ISA as a cash store, this is the year to rethink that.
- Consider a money market fund for near-cash inside the ISA. If you genuinely want a low-risk, cash-like holding inside a stocks and shares ISA, a money market fund is the compliant route, and it is not caught by the charge. Remember the portfolio cannot be entirely cash-like.
- Use your full cash ISA allowance this tax year. The under-65 cap does not bite until April 2027, so the 2026/27 allowance still lets you shelter cash properly while the rules are unchanged. Our cash ISA cap guide sets out the timing.
- If you are ready, put the investment slice to work. The reform is designed to move idle ISA cash into investments. If that fits your goals and your time horizon, our guide to starting with £1,000 in the UK covers the basics, including low-cost global index funds.
- Check how your platform handles cash. Some investment platforms automatically sweep uninvested cash into an interest-paying facility. From April 2027 that interest is what the charge applies to, so it is worth knowing how your provider treats it.
Frequently asked questions
Does the 22% charge apply to my investments?
No. It applies only to interest on uninvested cash inside a stocks and shares ISA or innovative finance ISA. Shares, funds, ETFs and bonds are unaffected, and the returns on them stay tax-free inside the ISA as before.
Is a cash ISA affected by the charge?
No. Interest in a cash ISA remains tax-free. The 22% charge applies only to cash held in a non-cash ISA, meaning a stocks and shares or innovative finance ISA. Cash ISAs have their own change to watch, the £12,000 under-65 cap, which we cover separately.
I am over 65. Does this affect me?
Yes, on this point. The £12,000 cash ISA cap exempts over-65s, but the 22% charge on cash held in an investment ISA is not age-limited. If you keep cash inside a stocks and shares ISA, the charge applies whatever your age.
Can I avoid the charge with a money market fund?
A money market fund held inside a stocks and shares ISA is not treated as cash for the charge, so it is the compliant way to hold a low-risk, near-cash position inside the wrapper. The one rule is that an ISA cannot be entirely cash-like, so a money market fund has to sit alongside genuine investments, not replace them all.
Is this definitely happening?
The charge has been announced to take effect from 6 April 2027, and the government is to consult with industry on the draft legislation. As with any measure still being consulted on, the fine detail could change before it becomes law, so it is worth watching for the final rules. The direction, though, is set.
The Savvy Investor’s take
The £12,000 cash ISA cap got the headlines, but the 22% charge is the part that quietly changes behaviour. It is aimed at a specific habit: treating a stocks and shares ISA as a tax-free savings account. For anyone doing that, the message from April 2027 is simple. Cash goes in a cash ISA or a savings account, investments go in the investment ISA, and a money market fund is the one bridge between the two.
For most savers who actually invest their stocks and shares ISA, this changes nothing. For the smaller group using it as a cash shelter, it is worth sorting out in the 2026/27 tax year while the old rules still apply, rather than being caught by the charge in April 2027.
This article is general information about a government reform that is being consulted on, and is not financial advice. The rules described are announced proposals that may change before they take effect on 6 April 2027. Whether any ISA or savings product suits you depends on your own circumstances. For regulated advice, speak to a financial adviser authorised by the Financial Conduct Authority. Savvy Investor Guide is not authorised or regulated by the FCA.
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