The government has confirmed significant changes to Individual Savings Accounts (ISAs) that will take effect from April 2027. Under the new rules, savers under the age of 65 will face a reduced annual cash ISA limit of £12,000, down from the current £20,000. Additionally, a 22% charge will be applied to interest earned on cash held in non-cash ISAs, such as stocks and shares ISAs or innovative finance ISAs.
Key Changes for Under-65s
Starting in the 2027-28 tax year, anyone under 65 can save a maximum of £12,000 per year in a cash ISA. Any savings above this threshold must be placed in a non-ISA savings account or a stocks and shares ISA. The £20,000 overall ISA subscription limit remains unchanged, but the cash ISA component is restricted.
From April 2027, interest earned on cash held in a non-cash ISA will be taxed at 22%. This includes interest on uninvested cash within a stocks and shares ISA, as well as alternative finance returns, such as those from Sharia-compliant accounts. However, returns from Money Market Funds, which invest in short-term debt securities, will not be subject to this charge.
Exemptions for Over-65s
Savers aged 65 and over will continue to enjoy the full £20,000 cash ISA limit. They are not affected by the new restrictions. However, once a saver turns 65, the 22% charge on cash held in non-cash ISAs will still apply if they hold interest-earning cash in such accounts.
Transfer Restrictions
From April 2027, under-65s will no longer be able to transfer money from non-cash ISAs to cash ISAs. However, transfers from cash ISAs to non-cash ISAs will remain permitted. This measure is designed to prevent individuals from circumventing the reduced cash ISA limit by moving funds between account types.
Government Rationale
The government states that these changes aim to prevent people from using non-cash ISAs as de facto cash ISAs once the cash ISA limit is reduced. Claire Trott, head of advice at St James’s Place, commented: “Holding cash or cash-like assets within a stocks and shares Isa is often a normal part of the investment journey. Investors may temporarily hold cash while deciding where to invest, when switching investments, or while waiting for money to be reinvested.”
Impact on Savers
The new rules will require careful planning for savers, particularly those under 65 who have historically used cash ISAs for tax-free interest. The 22% charge on non-cash ISA cash holdings could reduce returns for those who maintain significant cash positions within investment accounts. Savers may need to consider alternative strategies, such as investing in Money Market Funds or using non-ISA accounts for cash holdings above the £12,000 limit.
