Holding Cash in a Stocks ISA? You Could Soon Face a 22% Tax Charge

Savers who hold cash inside a stocks and shares ISA will be charged a flat 22% tax on the interest it earns from April 2027, under reforms HM Revenue and Customs set out in a tax policy paper on 23 June.

Who gets caught is the part that will unsettle many savers. The charge bites only on interest from uninvested cash, yet holding some cash inside an investment account is routine. People leave money there while waiting to buy shares, after selling a holding, or to cover platform fees. From April 2027, the interest on those balances becomes taxable, so the rule can reach ordinary investors as readily as anyone deliberately sidestepping the limits.

What the charge does not touch matters just as much. Shares, funds, and other qualifying investments keep their tax-free status, so this is not a new tax on capital gains or dividends inside the wrapper. Only cash interest is in scope.

How the Cash ISA Cap Triggered the Crackdown

The change traces back to last November's Budget. Chancellor Rachel Reeves cut the annual cash ISA allowance for under-65s from £20,000 (about $26,600) to £12,000 (around $16,000), the first reduction since 2017. The overall ISA limit stayed at £20,000, and savers aged 65 and over kept the full cash allowance.

Reeves pitched it as a nudge towards investing, telling MPs she would designate £8,000 of the allowance 'exclusively for investment'. The aim was to channel more household money into UK companies and capital markets.

That left an obvious gap. A saver could place up to £20,000 in cash inside a stocks and shares ISA and leave it untouched, sidestepping the tighter cash cap entirely. The 22% charge is designed to shut that route.

The Three New Rules Reshaping Stocks and Shares ISAs

The interest charge is one of three measures HMRC confirmed.

Under-65s will also be barred from moving money out of stocks and shares or innovative finance ISAs into a cash ISA, though transfers the other way, from cash into investments, remain allowed.

The third rule covers money market funds, the low-risk, cash-like holdings some savers use as a parking spot. Investors can still hold them, but they cannot fill an entire account with them. An outright ban, HMRC said, 'would hamper normal investor behaviour.'

The 22% rate matches the new basic rate of income tax on savings interest held outside an ISA, which rises from 20% to 22% on the same April 2027 date. Cash, in other words, ends up taxed at a similar level wherever a saver keeps it.

Why the Savings Industry Is Pushing Back

Reaction from the savings sector has been cool. Brian Byrnes, director of personal finance at Moneybox, said the rules make 'one of the UK's most important investment products significantly more complex' than it is today.

Alex Campbell, director of external affairs at Freetrade, warned of 'unintended consequences', predicting some platforms might cut or scrap interest on cash balances to spare customers the charge. Savers could then earn nothing on money they have yet to invest.

The reform is aimed at a narrow group. Royal London research suggests only around 16% of ISA holders use the full £20,000 allowance, so most savers will not feel it. The bigger target is the 8.6 million people the Financial Conduct Authority estimates hold £10,000 (about $13,300) or more in cash that could be invested.

Much of the fine print is still to come. HMRC says the minimum share of an account that cannot sit in money market funds, and other operational points, will appear in its next Tax Free Savings newsletter. Draft rules face a short technical consultation before going to Parliament ahead of April 2027.

Until those rules are published, savers face a wait to learn exactly how much uninvested cash they can hold in a stocks and shares ISA before the 22% charge starts to bite.