The 2027 ISA Cash Rules: A New 22% Charge, Explained and Why Most Investors Needn’t Worry

The government has just set out how it will police the lower Cash ISA limit coming in April 2027. The headline is a 22% charge on interest earned on cash held inside a Stocks and Shares ISA. It sounds like a tax raid on your investments. It isn't, and for most people who actually invest, it changes very little.

4 min read - Part of News & Updates at FreeBefore65.

On 23 June the Treasury published the detail behind a change it first announced last autumn. From 6 April 2027, the amount you can pay into a Cash ISA each year drops from £20,000 to £12,000 if you're under 65. The overall ISA limit stays at £20,000, so the other £8,000 has to go into a Stocks and Shares, Innovative Finance or Lifetime ISA instead. This week's announcement is about stopping people sidestepping that by parking cash inside a Stocks and Shares ISA, and it's where the new charge comes in.

What's actually been announced

The rules, all starting 6 April 2027, are these:

• A flat 22% charge on any interest earned on cash held within a Stocks and Shares or Innovative Finance ISA. Cash sitting in those accounts will no longer earn interest entirely tax-free.
• A ban on holding a non-cash ISA made up entirely of cash-like investments. From 2027 "cash-like" means money market funds, and you won't be allowed to hold 100% of them. A partial allocation alongside genuine investments is fine.
• No more transfers from a Stocks and Shares ISA into a Cash ISA. The reverse, Cash into Stocks and Shares, is still allowed.
• If you're 65 or over, you keep the full £20,000 Cash ISA limit, from the start of the tax year in which you turn 65, and the transfer ban won't apply to you. The 22% interest charge and the no-100%-cash rule still will.

The limits for Innovative Finance ISAs, Lifetime ISAs and Stocks and Shares ISAs themselves are unchanged.

You may already have spotted what looks like a gap.

The 100% rule is about what your ISA is made of, not the proportions, so holding almost entirely money market funds with a token slice in a single share or fund would, as the rules are currently written, keep the account qualifying. And because money market fund returns aren’t treated as interest, they avoid the 22% charge anyway. On paper, then, you could run something close to a cash account inside a stocks and shares ISA and pay nothing on it. I wouldn’t build anything on that, though. This is draft legislation about to go into consultation, and a “one share and the rest in cash-like funds” structure is exactly the kind of obvious workaround these anti-circumvention rules tend to close before they ever come into force.

What it doesn't change

This is the part the headlines skate over. If you use a Stocks and Shares ISA the way most people do, holding actual investments, almost none of this touches you. Your gains stay tax-free. Your dividends stay tax-free. Hold investments rather than cash and the charge largely passes you by. It does, though, apply to interest on any uninvested cash in the account, including dividend payments and money waiting to be reinvested, not only cash deliberately parked there. Quite how the small everyday balances get handled is one of the things the coming consultation still has to settle.

Who it actually affects

The people who'll feel it are under-65 savers who lean heavily on cash and were using the £20,000 limit, or the wrapper itself, to shelter it. From 2027 only £12,000 of that can go into a Cash ISA, and the old trick of holding the rest as cash in a Stocks and Shares ISA now carries a charge. I'm 58, so I'm in that under-65 group rather than among the over-65s who keep the full allowance. It's worth knowing where you sit.

What I'm doing about it

For now, nothing. It isn't law yet. A technical consultation with the industry is still to come, and the fine detail can shift before April 2027. I hold investments in my Stocks and Shares ISA rather than a pile of cash, so the charge isn't a problem for me, and the lower cash limit is simply something I'll factor into how I move money around in the bridge years before my pensions start. The one thing worth not doing is making a hasty change to your savings now, over a rule that's still eighteen months off and not yet finalised.

As ever with these announcements, the headline ran well ahead of the detail, and the detail is narrower and less alarming than "new ISA tax" suggests. The government's own factsheet sets it out in a couple of pages, and it's worth a read if cash ISAs are a big part of how you save.