The government has confirmed significant changes to Individual Savings Accounts (ISAs) that will come into effect from 6 April 2027. While the overall annual ISA allowance will remain at £20,000, new restrictions will limit how much most people can place into a cash ISA.
The changes are designed to encourage more investment into stocks and shares while preventing savers from using non-cash ISAs simply as tax-free cash savings accounts.
From 6 April 2027, anyone aged under 65 will still have an overall annual ISA allowance of £20,000, but only £12,000 of that amount will be available for cash ISA savings.
The remaining £8,000 of the allowance will not be lost, but it will need to be used for investment-based ISA products, such as a stocks and shares ISA or an innovative finance ISA, rather than being retained as cash savings.
The policy aim is to shift part of the ISA tax advantage away from cash savings and towards investment. In practice, this means that savers under 65 who want to use their full ISA allowance will need to consider whether they are comfortable investing the balance above the new cash ISA limit.
The government is also seeking to stop savers from preserving a cash-based position by using non-cash ISAs as a substitute cash account. The new rules are therefore intended to prevent people from:
paying cash into a stocks and shares or innovative finance ISA and simply leaving it there to earn interest;
using a non-cash ISA as a temporary route before moving the money into a cash ISA;
holding an ISA in cash or cash-like assets rather than making genuine investments.
transferring funds from a non-cash ISA into a cash ISA to access the higher cash limit indirectly; or
To reinforce this change, the rules introduce a 22% flat-rate charge on interest paid or credited on cash held within non-cash ISAs. This is designed to discourage savers from using stocks and shares ISAs or innovative finance ISAs as a way of continuing to hold cash tax-efficiently once the new cash ISA limit applies.
The charge will be accounted for by ISA managers rather than being declared by individuals. It will apply regardless of whether the saver is a non-taxpayer, basic rate, higher rate or additional rate taxpayer, and the Personal Savings Allowance will not be available to reduce it.
The effect is that surplus cash cannot simply be sheltered elsewhere within the ISA wrapper. If cash is held in a non-cash ISA, interest or alternative finance returns on that cash will suffer the 22% charge; alternatively, the funds will need to be invested or withdrawn from the ISA.
There will also be a new transfer restriction. From 6 April 2027, transfers from non-cash ISAs into cash ISAs will not generally be permitted for individuals under 65, although transfers from cash ISAs into non-cash ISAs will remain possible.
There will also be restrictions on portfolios made up entirely of cash-like investments. Cash-like assets will still be capable of being held in a non-cash ISA as part of a wider investment portfolio. However, a non-cash ISA invested entirely in cash-like assets will be treated as holding non-qualifying investments, so ISA managers are expected to require corrective action in those cases.
The changes are much less restrictive for older savers.
Anyone aged 65 or over will continue to benefit from the current £20,000 annual cash ISA allowance. This entitlement begins from the start of the tax year in which they reach 65.
However, the 22% charge on interest earned from cash held within a non-cash ISA and the restrictions on holding entirely cash-like investments will still apply. The restriction on transfers from non-cash ISAs into cash ISAs will be disapplied from the start of the tax year in which an individual turns 65.
For many savers, there is no immediate action to take as these changes do not come into force until April 2027. However, anyone who regularly uses cash ISAs or prefers to keep significant amounts of cash within investment ISAs should begin thinking about how these changes may affect their future savings strategy.
As the rules become clearer over the coming months, it will be important to review whether your ISA arrangements continue to meet your objectives, whether excess cash should be invested, and whether a different mix of cash and investments would be more appropriate.
If you would like advice on how these changes could affect you, our tax and financial planning specialists would be happy to help.
The government’s factsheet on the ISA anti circumvention rules is available here.
All data and figures referred to in our news section are correct at the date of publishing and should not be relied upon as still current.
