HMRC Confirms 22% Tax on Cash in Stocks & Shares ISAs

The UK government is moving ahead with significant changes to Individual Savings Accounts (ISAs), introducing new rules that could affect millions of savers from April 2027.

Under proposals expected to be formally announced by HM Revenue & Customs (HMRC), interest earned on cash held within a Stocks & Shares ISA will face a new 22% tax charge. The changes form part of a wider government strategy aimed at encouraging more people to invest rather than hold large amounts of cash within tax-advantaged accounts.

The reforms follow last year's announcement that the annual Cash ISA allowance for people under 65 will be reduced from £20,000 to £12,000, while the overall ISA allowance remains unchanged at £20,000.

What Is Changing?

The biggest change is the introduction of a flat-rate 22% charge on interest earned from uninvested cash held within Stocks & Shares ISAs. Currently, any interest earned inside an ISA is generally tax-free.

In practical terms, investors who keep large cash balances inside their investment ISA while waiting to invest may see their returns reduced under the new rules.

HMRC also plans to introduce additional restrictions designed to prevent savers from using Stocks & Shares ISAs as a substitute for Cash ISAs.

These include:

• A prohibition on portfolios being invested entirely in money market funds.

• Restrictions on transferring money from Stocks & Shares ISAs back into Cash ISAs.

• Continued allowance for transfers from Cash ISAs into Stocks & Shares ISAs.

Why Is The Government Making These Changes?

The government's stated objective is to encourage greater participation in investing and direct more capital towards businesses and financial markets.

Research consistently shows that long-term investors have historically achieved higher returns than savers holding cash, although investing carries greater risk and returns are never guaranteed.

By limiting Cash ISA usage and discouraging large cash balances within investment ISAs, policymakers hope more savers will consider investing as part of their long-term financial planning.

What About Money Market Funds?

One area that had caused uncertainty was the treatment of money market funds.

Money market funds are often viewed as a stepping stone between cash savings and investing. They typically invest in short-term government debt and other low-risk assets, providing returns similar to savings accounts.

HMRC has indicated that money market funds will continue to be allowed within Stocks & Shares ISAs. However, investors will not be permitted to hold portfolios consisting entirely of these "cash-like" assets.

For cautious investors who use money market funds as a temporary parking place before investing, this may be one of the most significant practical implications of the new rules.

Industry Concerns

The proposed reforms have drawn criticism from parts of the investment industry.

Several providers argue that ISAs have historically been successful because of their simplicity. Introducing taxes on certain holdings within Stocks & Shares ISAs risks making the system more complicated for consumers.

Some investment platforms have also warned that they may reconsider paying interest on cash balances held within ISAs if doing so creates additional tax liabilities for customers.

Others have questioned whether the reforms could unintentionally discourage cautious savers from taking their first steps into investing.

What Should Savers Do?

For now, existing ISA rules remain unchanged.

The new restrictions are expected to take effect from April 2027, giving savers time to review their strategy.

Investors who regularly keep large amounts of cash inside a Stocks & Shares ISA may want to pay closer attention to future announcements from their provider and consider how the new rules could affect their returns.

Meanwhile, anyone planning to maximise their Cash ISA allowance may wish to take advantage of the current £20,000 limit before the reduced £12,000 allowance comes into force for under-65s.

The Bottom Line

The government's ISA reforms represent one of the biggest shake-ups to the UK's savings landscape in years.

While ministers hope the changes will encourage greater participation in investing, critics argue that introducing taxes and restrictions inside Stocks & Shares ISAs could undermine the simplicity that has made ISAs so popular.

With implementation due from April 2027, savers still have time to prepare—but the direction of travel is clear: the government wants more of Britain's savings invested and less sitting in cash.