The UK government has confirmed that interest earned on cash held inside Stocks and Shares ISAs will face a flat-rate charge of 22 per cent from 6 April 2027, prompting warnings from investment platforms about greater complexity for savers.

The charge will also apply to cash held in Innovative Finance ISAs. It forms part of a package of anti-circumvention rules supporting the government’s decision to reduce the annual Cash ISA allowance from £20,000 to £12,000 for people under 65.

The overall Individual Savings Account allowance will remain at £20,000, allowing savers to place the remaining £8,000 into investments. People aged 65 and over will retain the full £20,000 Cash ISA allowance.

Ministers say the changes will encourage more people to invest and prevent savers from avoiding the lower cash limit by placing money in a Stocks and Shares ISA while leaving it uninvested and earning tax-free interest.

Dan Moczulski, UK managing director at online trading and investment platform eToro, described the interest charge as “a backwards step for Britain’s investment culture”.

“British savers remain deeply entrenched in cash, and turning them into investors requires confidence, education and small nudges over time,” he said.

“This tax does the opposite. It adds friction and confusion, pushing people away from investing just when the UK should be making it easier for people to get started on their investment journey.”

 New boundaries between saving and investing

Investors will continue to be able to hold cash within Stocks and Shares and Innovative Finance ISAs. Any interest or alternative finance return paid on that money will be subject to the new charge.

The government is also introducing restrictions covering transfers and assets that behave like cash.

People under 65 will be prevented from transferring money from a Stocks and Shares or Innovative Finance ISA into a Cash ISA. Transfers in the opposite direction will remain available.

The transfer restriction will cease to apply from the start of the tax year in which a person turns 65. However, the 22 per cent interest charge will continue to apply to cash held in their non-cash ISAs.

Portfolios held entirely in investments classified as cash-like will also become ineligible. The initial definition will cover money market funds, which invest in short-term debt and are commonly used to hold money with relatively low volatility.

Money market funds will remain eligible as part of a broader portfolio, while accounts invested entirely in them will fall outside the qualifying rules. Shares, investment funds, investment trusts, exchange-traded funds, corporate bonds and government bonds will remain outside the cash-like classification.

ISA platforms face operational changes

The reforms will require ISA managers and wealthtech platforms to make changes across product design, transfer processes, reporting and customer communications before April 2027.

ISA providers will have to report the value of money market fund holdings through their end-of-year statistical returns. Where an account contains only assets treated as cash-like, providers will be expected to help the customer sell and reinvest the assets or remove them from the ISA.

Platforms will also need to explain the distinction between cash held temporarily while a customer chooses an investment and money left uninvested for longer periods. Both may earn interest, with that interest falling within the 22 per cent charge.

Further technical detail will be needed on how the charge is calculated, presented to customers and administered by providers. Draft legislation is due to be published for consultation, with regulations expected in the autumn.

Rob Morgan, chief investment analyst at investment platform Charles Stanley Direct, said the package risked reversing some of the simplification introduced through the ISA reforms of 2014.

Those reforms created an equal allowance for cash and investments and increased the freedom to move money between the two. Morgan said the new rules would reintroduce different treatments within a product commonly presented to customers as a straightforward tax-free wrapper.

“A product that has long been marketed as a straightforward, tax-free wrapper will come with a significant caveat,” he said.

“It remains to be seen how much damage that will do to the clarity and appeal of the ISA brand.”

 Temporary cash becomes part of the tax calculation

Cash can serve several purposes within an investment account. Customers may hold sale proceeds while considering their next investment, build up smaller contributions before placing a trade or reduce their exposure to market movements as they approach retirement.

Money market funds can perform a similar role by providing access to relatively stable, liquid assets within a wider portfolio.

Morgan warned that restrictions intended to prevent avoidance of the lower Cash ISA allowance could also affect these portfolio-management decisions.

“Customers frequently hold cash temporarily while deciding how to deploy money, or use low-risk assets to de-risk portfolios,” he said. “This is particularly the case as they approach or enter retirement, when controlling market volatility can be paramount.”

The government says partial allocations to money market funds will remain permitted, preserving the ability to include lower-risk assets within a diversified portfolio. The prohibition applies when cash-like investments account for the whole ISA.

Providers will still need to determine how customers move between qualifying and non-qualifying positions and how quickly accounts must be corrected when market activity or customer instructions leave a portfolio wholly invested in money market funds.

The measures arrive as the government seeks to develop a stronger retail investment culture and direct more household savings towards productive assets. Its approach relies partly on narrowing the advantages of holding cash within tax-free accounts.

Investment platforms argue that customer confidence also depends on understanding the product and retaining room to adjust risk. The forthcoming technical consultation will set the terms on which providers must reconcile those competing aims before the rules take effect on 6 April 2027.