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Returns from cash held in tax-efficient stocks and shares individual savings accounts (ISAs) will be taxed at 22% from April next year, the government has confirmed.
The news will come as a bitter blow to investors, many of whom temporarily hold cash in their stocks and shares ISA while deciding where to invest, when switching investments, or while waiting for money to be reinvested.
Here, we explain how the new tax charge will work, and the likely impact it will have.
What’s changing?
If you hold cash within a stocks and shares ISA, any interest earned on that cash could be subject to a 22% charge from next April.
For example, if you held £20,000 in cash within a stocks and shares ISA, and this money was earning 4% interest, you would receive £800 in interest over a year. Under the new rules, a 22% charge would reduce this by £176, leaving you with £624.
You would still be able to hold some cash-like investments in a Stocks and Shares ISA, such as money market funds, without incurring a tax charge, but from April 2027, these can no longer make up your entire portfolio. You can find out more about how money market funds work in our article What is a money market fund?
Most investments commonly held in stocks and shares ISAs won’t be treated as cash-like assets and therefore shouldn’t be affected by the new tax charge. This includes shares, investment funds, investment trusts, exchange-traded funds (ETFs), corporate bonds and government bonds, including gilts.
Claire Trott, head of advice at St. James’s Place, said: “One of the strengths of the ISA system has been that people generally understand the broad principle that money held within the wrapper can grow free from UK income and capital gains tax. As rules become more nuanced, there is a risk that consumers become less certain about how their savings will be treated and whether they need to take action.
“For experienced investors, these changes may simply represent another consideration when managing their finances. However, for those considering investing for the first time, additional complexity can become a barrier in itself. If people feel unsure about how the rules work or what products are most appropriate for them, some may delay taking the first step towards investing.”
How are ISA transfers and limits changing?
Under the proposals, from next April, savers would no longer be able to transfer money from a stocks and shares ISA or another non-cash ISA into a cash ISA.
However, transfers in the other direction, from a cash ISA into a stocks and shares or non-cash ISA, would still be allowed. This restriction on transferring money from a non-cash ISA into a cash ISA won’t apply to those aged 65 or over.
Katie Horne, savings expert at Flagstone, said: “Measures like this curtail the freedom savers have to make the sorts of savings and investment decisions that suit their own individual needs. For many, the decision to keep cash in a stocks and shares ISA is a temporary one, or one that’s made to suit a very specific set of personal requirements. Likewise, moving funds from a stocks and shares ISA into a cash ISA product is a well-worn process that thousands of ISA savers use to derisk at points in their lives when certainty over the value of their funds is essential.”
ISA limits are also changing. The new cash ISA limit for those under 65 will be £12,000, but the limits for Innovative Finance ISAs, and stocks and shares ISAs will remain at £20,000.
Why are new tax charges being introduced?
The new charge has been introduced to prevent savers from using stocks and shares ISAs as an alternative way to hold cash once changes to ISA limits for under 65s come into effect.
Without the charge, there are concerns that some people could sidestep the lower cash ISA limit by putting money into a stocks and shares ISA and simply leave it in cash rather than investing it. This would allow them to continue sheltering more cash from tax than the new cash ISA rules are intended to permit.
How will the tax be collected?
The government is expected to collect the charge through ISA providers, meaning investors are unlikely to need to declare it separately on a tax return. Full details are expected to be confirmed this autumn.
Will tax be charged on returns from money held in cash ISAs?
No, returns from money held in cash ISAs will still be protected from the taxman, and don’t need to be declared on your tax return.
Kevin Mountford, personal finance expert and co-founder of Raisin UK, said: “The change to ISA rules risks creating confusion for savers, particularly when many people are already trying to make their money work harder in a higher-tax environment. The key point for consumers is that this does not mean cash ISAs are suddenly being taxed. A cash ISA is still designed to let people earn savings interest tax-free, within the usual ISA allowance.”
You can find the current best buy ISA rates in our article Best cash ISA rates – which cash ISAs pay the most interest?
When will the changes come into effect?
The government plans to consult on the draft legislation shortly, with the aim that the regulations will be confirmed this autumn, so the new rules can come into effect from April next year.
Mr Mountford said: “Someone using a cash ISA for their savings should not panic, but anyone holding large cash balances inside a stocks and shares ISA may need to check how their provider treats that money from April 2027.”
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