What the cash ISA reforms mean for you as Treasury confirms new interest charges
The Treasury has confirmed how new cash ISA restrictions will work, including plans for a charge on interest earned on cash held in a stocks and shares ISA.
Investors will face a charge on any interest paid on cash in a stocks and shares ISA, the Treasury has confirmed in its latest guidance on ISA reforms.
Plans are underway to reduce the cash ISA allowance to £12,000 per year from April 2027 for savers under age 65.
The Treasury is also disincentivising holding uninvested cash in a stocks and shares ISA and restricting how much can be held in cash-style products within this type of ISA.
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It has confirmed plans for a 22% charge on any interest or alternative finance return paid on cash held within a non-cash ISA, from April 2027. This may be money that account holders haven’t invested yet or from dividends paid out.
But in some good news for investors, money market funds will be allowed in a stocks and shares ISA as long as they do not make up 100% of the investments.
Common investments held in stocks and shares ISAs such as individual shares, funds, investment trusts, exchange-traded funds and corporate and government bonds, including UK gilts, will not be treated as cash-like assets, the Treasury said.
James Carter, head of platform policy at Fidelity International, said: “We are pleased to see that cash-like investments will remain eligible for non-cash ISAs.
“These products are genuine investment products, holding short-term government and high-quality debt, and form a valued part of many balanced portfolios. Removing them from the stocks and shares ISA framework would have undermined the government’s objective of encouraging more people to invest, by giving customers a cliff edge choice between staying in cash or moving directly into higher-risk, more complex products.”
New restrictions on transfers into cash ISAs
Transfers from stocks and shares ISAs into cash ISAs will not be permitted but it will be allowed the other way round.
Individuals aged 65 and over will still benefit from a higher cash ISA limit of £20,000 per year, if they wish to use the full annual ISA allowance for that type of account.
The transfer restriction will be stopped from this point but the charge on interest earned on cash in a stocks and shares ISA and the prohibition on 100% cash-like investments will remain in place.
A technical consultation is due to be released by the Treasury on how the charge will work.
Greg Davies, head of behavioural finance at Oxford Risk, has already warned that the measure risks backfiring.
He said: “Getting people invested is an inherently behavioural challenge. You do not encourage nervous savers into investing by making the first step feel more complicated, more punitive and harder to reverse.
“People move from cash into markets when the journey feels clear, safe enough, and matched to their goals, time horizon and financial circumstances. Adding tax charges and transfer restrictions to an already confusing ISA system sends precisely the wrong behavioural signal.
“For many would-be investors, this will not create confident investors. It will create more hesitation, more disengagement, and more people doing nothing.”
Rachel Vahey, head of public policy for AJ Bell, warned that the changes are “increasingly complex” and “riddled with unintended consequences” and may mean people just keep money in cash ISAs instead.
She said: “The new rules mean a charge of 22% will be applied to interest paid on cash in investment ISAs. This is a flat rate charge, meaning the same rate applies whether the ISA account holder is a basic rate taxpayer, higher rate taxpayer, or indeed doesn’t pay any income tax.
“The ISA holder cannot invest 100% of their (non-cash) investment portfolio in money market funds, or that would be classed as a ‘non-qualifying’ investment. This means they could invest 99% in money market funds and 1% in, say, UK equities and that would be allowed.
“It also means they could hold 50% of their portfolio in cash, but if the remaining 50% was held in money market funds that wouldn’t be allowed. Whereas if they held 49% in money market funds and 1% in UK equities, this would be permitted under the rules.”
Will investment platforms stop paying interest on cash?
Several investment platforms such as Bestinvest, AJ Bell, interactive investor, Fidelity and Hargreaves Lansdown pay interest on cash held within a stocks and shares ISA.
The rates are not that competitive but the benefit for investors is that they can get cash in the wrapper or receive dividends and decide how they want to invest it.
It is currently unclear if platforms will stop paying interest or if investors will just need to be aware of the charge.
Carter said: “We have consistently welcomed the government’s recent focus on encouraging more people to invest, supporting better long-term outcomes. Recent initiatives such as a review of risk warnings, the introduction of a targeted support regime, and an education campaign on the benefits of investing, will all help to reset the approach to risk and bridge the gap between precautionary cash savings and long-term investment.
“We look forward to the publication of the technical consultation which will include further details required to enable providers to implement these changes.”
A spokesperson for AJ Bell was unable to comment on whether the platform will stop paying interest on cash.
Jason Hollands, managing director of Bestinvest, described the anti-circumvention measures as a "disproportionate response to a problem that may never meaningfully materialise."
He added: "Investors will also need to weigh up the relative difference in returns on a money market fund minus any platform fees, versus holding cash and having the 22% charge deducted."
MoneyWeek has asked Hargreaves Lansdown and interactive investor for comment.
