Savers who hold cash in stocks and shares Isas will be subject to a new 22% tax on interest earned from April 2027, the Treasury has announced, as part of a package of measures designed to prevent people using investment wrappers to get around new restrictions on cash Isa allowances.
The announcement comes via a factsheet published on the HMRC website and will be followed by a technical consultation with the financial industry before regulations are laid in the autumn. The changes are set to take effect from 6 April 2027.
What is changing and why
At the 2025 autumn budget, the government announced that from April 2027 the annual cash Isa allowance would be cut from £20,000 to £12,000. The limit for stocks and shares and innovative finance Isas – collectively known as non-cash Isas – will remain at £20,000. The stated aim is to push savers towards investing rather than simply sitting on tax-free cash, with the government wanting to build what it calls an “investment culture” in Britain.
However, officials identified a significant loophole: savers could effectively circumvent the new £12,000 cash limit by subscribing up to £20,000 into a stocks and shares Isa and then simply leaving the money in cash, earning tax-free interest without ever investing it. They could also subscribe the full £20,000 to a non-cash Isa and then transfer it into a cash Isa, or use it to buy “wholly cash-like” investments – meaning the £12,000 limit would become largely meaningless.
The 22% flat-rate charge on interest or alternative finance returns paid on cash held in non-cash Isas is the government’s chosen mechanism to close those gaps.
The cash Isa allowance for people aged 65 and over will remain at £20,000, regardless of these changes.
What the industry says
The reaction from financial services firms has been cautious to sceptical. Several have questioned whether the policy will achieve its objective – and suggested it may achieve the opposite.
Simon Harrington, head of public affairs at PIMFA, the Personal Investment Management and Financial Advice Association, said: “We remain sceptical that these changes will have any real effect on consumer investment behaviour and fear they will do the opposite. Far from encouraging take up, they risk making the stocks and shares Isa, the very wrapper the Government wants people to use, less attractive.”
Andrew Prosser, head of Investments at InvestEngine, raised a broader concern: “Our worry is that instead of encouraging investing, this could end up putting people off. If stocks and shares Isas become more complex and less straightforward, some savers may just disengage altogether – which would go against the whole point of trying to build a stronger investing culture in the first place. What we really need is to improve financial education and make it more accessible – that would do far more to encourage people to invest than simply restricting how they use their savings.”
Jeremy Cox, head of strategy at Coventry Building Society, was blunter: “We’re moving away from a fair and straightforward Isa system, where all adults can save or invest up to £20,000 tax-free each year, towards a more complex and confusing set of rules that will feel unfair to many consumers.”
More measured responses
Not everyone in the industry was critical. Tom Riley, Nationwide Building Society’s group director of retail products, welcomed the move: “Ensuring a level playing field between cash and non-cash Isas is vital to maintaining a strong savings market. We welcome the Government’s introduction of controls to support its ambition to get more people investing, while ensuring over-65s can rely on the full cash Isa allowance.”
Andrew Gall of the Building Societies Association called for clarity and time: “It is vital that savers have clear information and sufficient time to understand how the changes will affect them and the choices available to them from April 2027. Building societies also need certainty on the final rules so they can update systems and communicate with their members well ahead of implementation.”
Jasvinder Gakhal, chief executive at Skipton Building Society, called the consultation “a step in the right direction” while warning that “the detail now matters.”
What it means for savers
For most ordinary savers, the practical impact will depend heavily on how they currently use their Isas. If you hold a stocks and shares Isa and keep cash within it – for example as a buffer before investing or simply earning interest while you decide what to do – you will face a 22% tax on any interest that cash earns from April 2027. That is a meaningful change from the current position, where all returns within an Isa are tax-free.
If you are primarily a cash saver and use a cash Isa, the main change is the reduction of the annual allowance from £20,000 to £12,000 from 2027 – though if you are 65 or over, your allowance stays at £20,000.
The government’s message is that it wants people to move from saving in cash to investing in stocks and shares. The question the industry is raising is whether introducing new taxes and complexity into the system is the most effective way to achieve that – or whether simpler incentives and better financial education might do more to change behaviour without making the Isa system harder to understand and less attractive overall.
The technical consultation with industry is due to start shortly. The final regulations will be laid in the autumn, giving savers and providers until April 2027 to prepare.
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