The New Tax on Cash Inside your Stocks and Shares ISA

It’s no secret that I’m a massive fan of Stocks and Shares ISA. I have several – Junior ISAs for the kids and adult ISAs for myself and my husband. I save into them every month diligently.

For years, I have encouraged my readers to do the same. To get their money out of low-interest savings accounts and into the market. I have written about it, filmed about it, and argued about it with anyone who will listen.

So when I tell you that the government’s latest proposal has genuinely made me angry, I want you to understand that this is not reflexive outrage. I have followed ISA policy closely for a long time.

I understand why the rules sometimes need to change. But this particular change feels like a punishment aimed at exactly the people I have spent years trying to help.

Here is what is being proposed.

What the government is planning

From April 2027, the government intends to introduce a tax charge on interest earned from cash held inside a Stocks and Shares ISA. Reports suggest the rate will be 22%, which would match the savings interest tax rate due to take effect at the same time. HMRC has confirmed a charge is coming.

The exact rate has not yet been confirmed in law, and the proposals are still in consultation, but the direction is clear.

This sits alongside two other changes already confirmed for April 2027. The annual Cash ISA allowance for under-65s will be cut from £20,000 to £12,000. And transfers from a Stocks and Shares ISA back into a Cash ISA will be banned.

Taken together, these are the most significant restrictions to the ISA system since the pre-2014 rules that first allowed cash to be held freely inside investment accounts.

Why the government says it is doing this

The official argument is about avoidance. The government is cutting the Cash ISA allowance because it wants more money flowing into the stock market rather than sitting in cash.

It is worried that people will sidestep the new lower limit by simply parking their cash inside a Stocks and Shares ISA instead, effectively using the investment wrapper as an extended cash shelter. Many stocks and shares ISAs now pay interest on cash held within them.

The 22% charge on cash interest is designed to close that loophole.

Why I think this is a mistake

Every serious investor holds cash inside their Stocks and Shares ISA at some point. Not as a loophole. Not to avoid the rules. But because investing involves timing, and timing involves waiting.

You sell a fund. The proceeds sit in cash while you decide what to buy next. You are waiting for a market dip. You have just received a lump sum and you are spreading your entry into the market over several months. You are rebalancing your portfolio. These are normal, sensible, entirely legitimate reasons to hold cash inside an ISA, and they have nothing to do with avoidance.
Taxing that cash punishes investors for behaving rationally and could result in cash being moved outside of an ISA.

It also looks likely to catch money market funds within its scope, and that is where the collateral damage starts to feel significant. A money market fund is a low-risk investment that generates returns close to cash interest rates, with minimal volatility.

Many cautious investors, particularly those approaching or in retirement, use money market funds as a temporary home for cash they are not yet ready to deploy elsewhere. Bringing these within the scope of the charge would affect people who are doing exactly what the government claims to want: using investment wrappers, taking a considered approach to their money, and not holding cash indefinitely.

Tom Selby at AJ Bell put it plainly. “Every ISA investor will need to navigate a more confusing landscape from April 2027”. I think he is being diplomatic. What I would say is that the people who are going to be most affected by this are not tax avoiders. They are diligent savers who have done everything right.

One source present at industry discussions with the Treasury described the reforms as being “made on the hoof with little understanding of how retail investors behave.” I find it hard to disagree. There is a consistent pattern in recent ISA policy of designing rules around an imagined bad actor and then hitting ordinary people in the process.

What this means for you right now

The consultation is still open, and nothing is law yet. It is possible the final rules will be softer than the proposals currently suggest, particularly around money market funds. The industry has pushed back hard, and there is time for the Treasury to listen.

For now, the most practical thing you can do is make sure you are using your full ISA allowance this tax year and next, before the new rules apply. The £20,000 annual allowance remains unchanged. If you have cash sitting outside an ISA that you intend to invest, getting it inside the wrapper before April 2027 is a sensible step.

If you hold money market funds inside a Stocks and Shares ISA, keep a close eye on the consultation outcome. I will update you here the moment the detail is confirmed.

In the meantime, I will keep watching this. I will keep writing about it. And I will keep saying what I believe: that an ISA is supposed to be a place where ordinary people can grow their money without the state taking a cut at every turn. This proposal moves us in the opposite direction.

What to do next

Check the best Stocks and Shares ISA providers and make sure your money is working in the right wrapper: investinginsiders.co.uk/best-stocks-shares-isa

See the current best Cash ISA rates before the rules change: investinginsiders.co.uk/best-cash-isa
Use our ISA calculator to model the long-term impact of sheltering your investments: investinginsiders.co.uk/stocks-and-shares-isa-calculator

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This article is for general information only and is not personal financial advice. The proposals described are subject to consultation and may change before April 2027. Tax treatment depends on individual circumstances. Sources: HMRC tax-free savings newsletter (November 2025); The Telegraph; GB News; AJ Bell.