From 6 April 2027, interest earned on cash held inside a stocks and shares ISA will be reduced by a flat 22% charge, deducted by the ISA manager and paid to HMRC before the saver sees it. HM Treasury and HMRC set out the rules in a tax policy paper on 23 June 2026, repeated in the GOV.UK factsheet “ISA reform 2027: anti-circumvention rules”.

The charge touches cash and nothing else. Shares, funds, ETFs, bonds and gilts in the same account are untouched, and money market funds are exempt. As an illustration, £5,000 held in cash for a full year at 4% would lose £44 of its £200 interest. What the charge signals matters more than what it costs: the Treasury no longer wants a stocks and shares ISA used as a cash ISA in disguise.

What exactly is caught by the 22% charge?

The GOV.UK factsheet applies the charge to “any interest or alternative finance return” paid on cash held within a non-cash ISA, the umbrella term for stocks and shares ISAs and innovative finance ISAs. Alternative finance return is the Sharia-compliant equivalent of interest.

The rate is flat at 22% for non-taxpayers, basic-rate and additional-rate taxpayers alike, with no allowance to set against it. The manager deducts it and settles it with HMRC, so the individual declares nothing and has no reclaim route. Age does not exempt anyone: a 70-year-old with cash sitting in a stocks and shares ISA pays exactly what a 30-year-old pays.

Which holdings inside a stocks and shares ISA escape the charge?

Everything that is actually an investment. The policy paper uses a separate concept, “cash-like assets”, and from April 2027 the only holding that counts as cash-like inside a non-cash ISA is a money market fund. The factsheet is explicit that short-dated gilts do not count as cash-like.

Money market fund income escapes the 22% charge, but a portfolio made up entirely of cash-like assets becomes a non-qualifying investment from April 2027. An ISA holding nothing but a money market fund would breach the rules; one that also holds shares or bonds, even partially, is fine.

Why has the Treasury put a charge on cash in a stocks and shares ISA?

Because of the other half of the same reform. From April 2027 the annual cash ISA limit for anyone under 65 falls from £20,000 to £12,000. The overall ISA allowance stays at £20,000, so the remaining £8,000 can only go into a non-cash ISA.

Without an anti-circumvention rule that cap would be trivial to sidestep: pay the extra £8,000 into a stocks and shares ISA and leave it as cash. The 22% charge, the cash-like restriction and the transfer rule close that route, and the policy paper states the aim plainly, to discourage long-term cash holdings in non-cash ISAs and to encourage retail investment.

Moneyfacts’ weekly ISA roundup for early September 2026 puts the top easy-access cash ISA at 4.61% AER, with Bank Rate at 3.75% ahead of the next decision on 17 September 2026. The site’s overview of the UK investment market sets out where that £8,000 might otherwise go.

How does the one-way transfer valve work?

From April 2027 a saver under 65 can move money from a cash ISA into a stocks and shares ISA but cannot move it back. Transfers from a non-cash ISA into a cash ISA are prohibited for under-65s. Without it the £8,000 non-cash allowance would become a waiting room: paid in during April, moved to a cash ISA in May, a £20,000 cash ISA by a longer route.

What does the over-65 carve-out actually exempt?

Two things, and not a third. People aged 65 and over keep a £20,000 cash ISA limit from the tax year in which they turn 65, and the transfer restriction does not apply to them. The carve-out does not touch the 22% charge or the ban on all-cash-like portfolios. Cash in a stocks and shares ISA held by an over-65 is charged like everyone else’s; the difference is the full £20,000 cash ISA available to move it to.

What does the 22% charge cost in pounds?

The table is an illustration at an assumed 4% rate.

Against a cash ISA the charge is a straight loss of £44 on £5,000 over a year. Against holding the cash outside any wrapper, 22% is slightly worse than basic-rate tax and considerably better than higher-rate tax. A non-taxpayer is worst affected in relative terms, having otherwise paid nothing.

Does the charge on cash waiting for a dip really matter?

For most investors, barely. Many people hold a slice of their stocks and shares ISA in cash, waiting for a market fall before buying. But the charge applies to the interest, not the balance. On the same illustrative 4% rate, £3,000 left uninvested for six weeks earns roughly £14, and the 22% charge on it is roughly £3. It only bites where a large sum is parked for a long time, exactly the behaviour the Treasury wants to discourage.

The 22% charge is, in truth, the least consequential part of the 2027 reforms for the ordinary saver. The cut in the cash ISA allowance from £20,000 to £12,000 is the change that alters what people can do with their money. The charge is a fence around that change, and a fence only matters to people who were planning to climb it.

Frequently asked questions

Does the 22% charge apply to innovative finance ISAs as well?
Yes. All non-cash ISAs are covered, innovative finance ISAs included.

Is the charge deducted automatically?
Yes. The ISA manager deducts it from the interest and pays HMRC. The saver declares nothing and cannot reclaim it.

Can a saver avoid the charge by holding a money market fund instead of cash?
Money market funds are exempt, but they are the only holding classed as cash-like, so an ISA made up entirely of them would be non-qualifying. Alongside other investments they are permitted.

Do the over-65 rules exempt older savers from the charge?
No. Over-65s keep a £20,000 cash ISA limit and the freedom to transfer into a cash ISA, but the charge applies to them in full.

The 2027 rules draw a line the ISA system never previously needed. A stocks and shares ISA is for investments, a cash ISA is for cash, and from 6 April 2027 the interest on cash held on the wrong side of that line costs 22%. For the saver with a few hundred pounds waiting for a dip it is a rounding error. For anyone planning to hold thousands in cash inside an investment wrapper for years, it is the Treasury saying that the cash ISA is where that money belongs.

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