22% tax on ISA cash: What investors need to know for 2027

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.