Investors holding cash in their stocks and shares ISA face a triple blow from next year when new rules come into effect.
From April 2027, any interest earned on uninvested cash held in a stocks and shares ISA will be taxed at 22%. Investors will also be barred from moving cash from their stocks and shares ISA into a cash ISA.
With many investment platforms paying low or no-interest on cash balances, experts are urging investors to check what interest their earning on uninvested cash held in their stocks and shares ISA, and consider if they could be left worse-off or trapped.
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Almost half (46%) of stocks and shares ISA providers pay 0% interest on cash, according to research by consumer group Fairer Finance, while 84% of platforms pay less than 3% – a level below the average for a savings account.
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Once the new rules come into force, investors who want to continue holding the cash will either need to swallow low interest rates and extra taxes, or use part of their annual ISA allowance to move it from the investment ISA into a cash ISA.
James Daley, managing director at Fairer Finance, said: “Consumers now face a triple blow: a new tax on cash held in their stocks and shares ISA, no ability to transfer back to a cash ISA, and investment platforms paying little or no interest.
“It’s quite normal for investors to hold cash in their investment accounts. Income that’s not automatically reinvested or maturing investments, can legitimately build up cash on account, and many investors may take their time to decide where to allocate it. Some investors may actively choose to increase their cash balances at certain parts of the market cycle.
“Penalising investors by not paying proper interest on cash holdings risks discouraging responsible investing rather than encouraging it.”
Interest rates on uninvested cash have tumbled ever since the Bank of England started reducing the base rate, research from Fairer Finance shows.
Of the 49 providers analysed by Fairer Finance, 21 offer no interest at all, 33 offer rates of less than 2% and 37 offer less than 3%.
Britain’s largest investment platform, Hargreaves Lansdown, has halved rates on cash balances below £10,000 since August 2024, moving from 2.75% to just 1.3% today.
The highest interest rate available for uninvested cash in a stocks and shares ISA is currently 3.8%, offered by Trading 212, although this has fallen from a peak of just over 5% in 2024.
What ISA rules are changing?
From April 2027, the ISA regime will receive its biggest shakeup since the tax wrapper was introduced in 1999.
While the total £20,000 annual ISA allowance will remain in place, savers under 65 will only be able to save a maximum of £12,000 a year in cash ISAs.
They will still have the overall £20,000 annual ISA allowance, so if they put £12,000 into cash ISAs in 2027/28, the remaining £8,000 of allowance that year would need to go into a stocks and shares ISA.
The change was announced in the 2025 Autumn Budget by then-chancellor Rachel Reeves who said she wanted to “create more of a culture in the UK of retail investing like what you have in the United States, to earn better returns for savers”.
HMRC later confirmed a set of new anti-circumvention rules in a bid to stop people simply holding cash within a stocks and shares ISA.
A new tax of 22% will be introduced on interest earned from uninvested cash in a stocks and shares ISA.
Meanwhile, ISA portfolios made up of 100% ‘cash-like’ investments like money market funds will also be banned.
To stop people from putting cash in their stocks and shares ISA and then transferring it to their cash ISA, you will not be able to complete an ISA transfer between a stocks and shares ISA and a cash ISA.
