Cash me if you can: the ISA tax change explained

Recent headlines might have left you wondering whether the government has decided to start taxing ISAs.

If you’ve only caught the headlines, you could be forgiven for thinking the tax-free status of ISAs is under threat. Fortunately, the reality is rather less dramatic.

ISAs remain one of the most valuable tax wrappers available to UK savers and investors. However, from April 2027, one specific aspect of ISA taxation is due to change, and it’s worth understanding what that means in practice.

The bit that is actually changing

From 6 April 2027, HMRC will introduce a 22% charge on interest earned from cash sitting inside a Stocks and Shares ISA. So, if you have money parked as cash within your investment ISA rather than actually invested, the interest accrued on it will no longer escape tax entirely.

Importantly, this does not affect investments held within the ISA. Shares, funds and other investments will continue to benefit from:

• No capital gains tax
• No dividend tax
• No tax on investment growth

It is only the interest on uninvested cash sitting inside a Stocks and Shares ISA that falls under this new charge and everything else keeps its tax free status intact.

Why is the government making this change?

At the same time as this new charge arrives, the cash ISA allowance for under 65s is being cut from £20,000 to £12,000 a year. The overall £20,000 ISA allowance stays the same, but only £12,000 of it can go into cash.

Some savers may seek a workaround: put money into a Stocks and Shares ISA, leave it in cash, and continue earning tax free interest. In effect, the account would be used more like a cash ISA than an investment ISA.

The new tax charge is intended to discourage that approach and reinforce the distinction between cash ISAs and investment ISAs.

What does this actually mean for you?

For most people, probably not very much as Stocks and Shares ISAs for the majority exist to hold investments. Having some cash sitting there temporarily, perhaps while you decide where to invest, or after selling something, is entirely normal and always has been. That has not changed and is not the target of these rules.

The change is aimed at those using a Stocks and Shares ISA as a long-term home for cash rather than as an investment account.

So should you be worried?

For the vast majority of savers, we would say no.

If your Stocks and Shares ISA is doing what it says on the tin, holding investments for the long term, it remains a highly tax-efficient way to grow your money and nothing about that has changed.

Where it might matter is if you tend to hold significant amounts of cash in a Stocks and Shares ISA for extended periods, or have been using it more like a savings account rather than an investment one.

If either of those sound familiar, it may be worth having a conversation about how your cash is currently held, and whether there is a better home for it.

The bigger picture

Strip away the headlines and this is less about “taxing ISAs” and more about nudging behaviour. The government wants more people investing rather than sitting on cash, and this charge is the stick to accompany the carrot of the wrapper itself.

Whether that is the right way to encourage investment is a debate for another day. What matters for your finances is that ISAs remain fundamentally tax efficient for what they’re designed to do and the change simply removes a loophole that was never really the point of the wrapper in the first place.

Where should cash actually live?

If you do hold meaningful sums of cash, and want it working properly rather than quietly gathering dust (or now, potentially, a tax charge) inside or outside of an investment ISA, there are better homes for it.

The Equilibrium Cash Service is designed for exactly this. It explores ways to hold cash outside an ISA wrapper, including National Savings & Investments and Flagstone’s cash platform. In addition, we can establish cash investments on the platforms we use, such as Nucleus, through fixed rate deposits, cash funds and gilts where appropriate. Full details are in our  brochure (downloadable below), and your financial planner would be happy to talk through which option, if any, makes sense for your circumstances.