New ISA Rules 2027: The 22% Tax & How To Legally Avoid It

The government has finally filled in the detail on its 2027 ISA overhaul — and there's more in it than the headline cash ISA cut. There's a new 22% charge, a carve-out most people will miss, and a transfer trap that catches exactly the savers least able to afford it. Here's what's confirmed, what isn't, and what it means in practice.

The headline: a smaller cash ISA

From 6 April 2027, the amount of new money you can pay into a cash ISA each tax year drops from £20,000 to £12,000 — but only if you're under 65. Anyone 65 or over keeps the full £20,000 cash allowance, and that reverts from the start of the tax year in which you turn 65, not on your birthday.

The overall ISA allowance stays at £20,000. So the missing £8,000 doesn't vanish — the Treasury simply wants it invested through a stocks and shares ISA rather than sat in cash. This is a nudge towards investing, dressed up as a savings reform.

Crucially, this only affects new money from April 2027. Anything already in your cash ISA stays sheltered. Nobody is retrospectively taxing existing pots – and if you're yet to take out a cash ISA for this tax year, then here's the top picks right now:

The new bit: a 22% charge on cash interest

The obvious workaround was always going to be the stocks and shares ISA. Its £20,000 limit is untouched, and nothing has ever stopped you holding plain cash inside one. So why not park the extra £8,000 there and collect tax-free interest?

Because from April 2027, interest on cash held inside a stocks and shares ISA will be hit with a flat 22% charge, paid straight to HMRC by your provider. You won't see a tax form — the money is simply deducted from your interest.

The odd part is that it's 22% for everyone, regardless of income tax band. Outside an ISA, from April 2027 a higher-rate taxpayer pays 42% on savings interest above their allowance and an additional-rate taxpayer pays 47%. Inside a stocks and shares ISA, both pay a flat 22%. So for higher earners, this "penalty" is actually cheaper than the alternative — which was presumably not the intention.

One more quirk: the 22% charge applies to over-65s too. They keep the full cash ISA allowance, but any cash sitting in their stocks and shares ISA is still charged. Their get-out is the transfer rule below — one that under-65s don't get.

The carve-out everyone will miss: money market funds

Here's the important part, and it's on the government's own factsheet. Money market funds — very low-risk funds that behave much like cash — are exempt from the 22% charge, provided they don't make up 100% of your stocks and shares ISA.

But note the wording carefully, because this is where a lot of coverage is going wrong. The exemption is for a money market fund you hold as an investment — not for uninvested cash that happens to earn interest. Several popular platforms (XTB and Trading 212 among them) pay interest on the cash sitting idle in your account, but that interest is precisely what the 22% charge is designed to catch. To use the carve-out properly, you'd need to actually buy a qualifying money market fund inside the ISA, and hold at least a sliver of something else so the fund isn't your entire pot.

Get that right and you've effectively rebuilt a cash-like holding inside a stocks and shares wrapper, tax-free. Two caveats before anyone rearranges their savings: the fine detail is still to be confirmed, and it depends entirely on your platform actually offering money market funds you can buy. Some list money market ETFs; others offer them as funds; some offer neither yet. Check before you commit.

The transfer trap

From April 2027, ISA transfers become a one-way street. You'll still be able to move money from a cash ISA into a stocks and shares ISA — the government would love you to — but not back the other way.

Think about who that hurts. Right now, if you've been investing and you're a year or two from buying a house, you can sell up and transfer the lot into a cash ISA, tax-free, and sit safely until completion. From April 2027, under-65s lose that option. Your choices shrink to: leave it as cash and pay the 22%, move it into a money market fund, or pull it out of the ISA entirely and lose the tax wrapper for good.

And here's the detail most reports have skipped — the ban only applies to under-65s. From the tax year you turn 65, you can transfer back to cash freely. So the people locked in are the ones most likely to need their money out of the market: younger savers building towards a deposit. If you're investing against a deadline, this is the change to plan around.

The Lifetime ISA is being replaced

Separately, the Lifetime ISA is being replaced by a new First-Time Buyer ISA, with the consultation now open. What's confirmed: it's for buying a first home only — no retirement option — with no upper age limit (so no more being cut off at 40) and, crucially, no withdrawal penalty. The bonus is paid when you buy, not as you save, so pulling your money out early costs you the bonus but not a chunk of your own cash, as the LISA's penalty does today.

That's genuinely fairer. The trade-off is that a bonus paid at the end never sits in your account compounding, the way a LISA bonus does over years.

The big numbers — the bonus rate, the contribution limit, the property price cap — haven't been announced. Launch is pencilled in for around April 2027, but with this much still undecided, it could slip. If you already hold a Lifetime ISA, don't worry: it continues indefinitely, and you can still open one now and keep the 25% bonus rolling in.

What to do now

For most people, nothing dramatic. You've got until April 2027 to use the full £20,000 cash allowance, so if you're a cash saver, make the most of it while it lasts. If you're under 40 and saving for a first home, the Lifetime ISA is still worth opening today — you lose nothing by having it. And if you're likely to be affected by the cash cut, keep an eye on the money market fund route, because if the final rules confirm it, the reform bites far less than the headlines suggest.

If you're weighing up a stocks and shares ISA ahead of the changes, the things that actually matter are cost, flexibility and what you can hold inside it. Low- or no-fee flexible providers like XTB score well on the first two — a flexible stocks and shares ISA with no platform or dealing fees on shares and ETFs (within limits) — though whether it suits you depends on the specific money market funds available and how hands-on you want to be.