22%. That's the flat rate at which interest on cash held inside stocks and shares ISAs will be taxed under draft rules published by HM Revenue and Customs and the Treasury. The change, announced alongside a consultation on a new First-Time Buyer ISA, will apply from April 2027 and is intended to stop savers using investment ISAs as tax free cash repositories. The package also cuts the annual Cash ISA allowance to £12,000 for under 65s while leaving the overall ISA subscription limit at £20,000.
22%. The Treasury and HM Revenue and Customs have set out draft legislation that would levy a uniform charge on interest paid on cash balances held inside non cash ISA wrappers, including Stocks and Shares ISAs.
The headline move is simple on paper but wide in scope. From April 2027 interest on cash inside stocks and shares ISAs would attract a 22% flat charge, a step intended to close a loophole that providers and savers have used to receive tax free interest by holding large cash balances inside investment accounts. The draft rules also bar transfers from non cash ISAs into cash like products designed to function as tax free savings, while still permitting transfers from Cash ISAs into investment accounts.
Alongside the tax charge the government proposes to restrict the use of money market funds within Stocks and Shares ISAs. Providers would be required to stop customers holding an entire stocks and shares ISA in money market funds. The guidance specifically proposes preventing 100% weightings in such funds to curb wholesale use of low risk, cash equivalent products to circumvent the new Cash ISA cap.
The other headline number is the new Cash ISA allowance. From April 2027 anyone aged under 65 would be limited to placing up to £12,000 a year into a Cash ISA, down from the previous £20,000 allowance. The overall annual ISA subscription limit would remain at £20,000, preserving the broader wrapper while narrowing the route for large, tax free cash deposits.
The consultation also asks about a replacement for the Lifetime ISA. The proposed First Time Buyer ISA would open to all adults aged 18 and over, removing the former upper age limit of 40 on opening a Lifetime ISA. This scheme would keep a 25% government bonus on sums saved but the bonus would be paid only when a property purchase completes rather than being credited annually during the savings period.
The Treasury would also remove the 25% withdrawal penalty that applied when money was taken out of a Lifetime ISA for reasons other than buying a first home or retirement.
The consultation doesn't propose changing the existing £450,000 cap on eligible property purchases for bonus eligibility. The Treasury asks providers to comment on that limit but points to existing analysis that the cap helps target support where it's most needed. This department framed the First Time Buyer ISA as a product better aligned with rising ages of first time home purchase.
Advisers and industry groups offered a mixed reception. Other industry voices warned that a flat 22% charge on interest inside investment wrappers will reduce net returns for cautious savers regardless of their personal tax position.
Operationally the changes would affect ordinary savers who use ISA wrappers, the platforms that run cash and stocks and shares ISAs, and the retail funds that offer cash like products. The draft legislation and consultation set out the rules and limits; responses to the consultation will feed into any amendments before the measures are finalised.
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If left unchanged the measures would take effect in April 2027; the Treasury will finalise technical details and set the operational timetable after reviewing consultation responses.
This article was created with AI assistance.
