Savers face a new 22 per cent levy on interest earned from cash held within stocks and shares ISAs.
In practice, what this means is that you could get a tax bill on money which is in your stocks and shares ISA, but not invested (in funds, shares, etc), if it earns interest paid by your ISA provider.
As an example, if you have exactly £10,000 invested in funds and sell it all (perhaps intended as a house deposit), the money sits in your stocks and shares ISA account. If your provider pays 3 per cent interest, across one year you would earn £300 in interest on the money. The 22 per cent tax bill is then applied to that interest, meaning you’d owe £66 in this particular example.
Any profits made when you sold those investments are not taxed, nor is the full amount of money held in the account - just the interest it earns.
Some providers do not pay interest on uninvested cash, while those who do typically tend to pay a lower amount than the best cash ISAs or general savings accounts - which is normal, considering the stocks and shares ISA exists for a different reason.
However, ahead of this change no money in ISAs is currently taxable at all, regardless of whether it comes from interest, dividends or capital tax.
Critics say this will add unnecessary complications for users and added complexity for businesses providing ISA services.
George Sweeney DipFA, investing expert at comparison site Finder, said: “Once again the structure of ISA accounts is being meddled with, and the new tax on interest on cash (in what’s supposed to be a tax-free stocks and shares ISA account) is just another notch on an increasingly more complex ISA ecosystem.
“With many investing platforms, it’s almost unavoidable to not hold at least some cash in the stocks and shares ISA wrapper because they don’t offer fractional shares.
“Not only is this new tax a burden for investors, it’s a complete headache for platforms too. It’s unclear exactly yet how the tax will be taken, whether ISA holders are going to have to start filing self-assessment tax returns going forward or if platforms will attempt to build some sort of withholding system. A big selling point of ISAs was supposed to be the simplicity and lack of paperwork.
“And the irony is, all this is happening under measures the government has comically named “Simplifying and modernising the tax system”.
The measure will be designed to prevent individuals from circumventing forthcoming restrictions on cash ISA allowances.
This follows an announcement at the Autumn Budget 2025 that, from April 2027, the annual cash ISA allowance will be cut to £12,000.
In contrast, the limit for stocks and shares and innovative finance ISAs will remain at £20,000, reflecting broader efforts to foster an investment culture.
The cash ISA allowance for those aged 65 and over will also stay at £20,000.
According to a factsheet published by HM Revenue and Customs (HMRC), new regulations are being implemented to guarantee the policy's intended outcome.
These rules specifically target individuals who might otherwise deposit up to £20,000 cash into a non-cash ISA, allowing it to accrue tax-free interest over an extended period.
The rules also aim to stop people subscribing £20,000 to a non-cash Isa and then transferring those funds to a cash Isa, or subscribing £20,000 to a non-cash Isa and use the funds to purchase “wholly cash-like” investments.
Among the changes, there will be a flat rate charge (22 per cent) on interest or alternative finance return paid on cash held within a non-cash Isa, HMRC said.
Simon Harrington, head of public affairs at PIMFA (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.”
HMRC said a technical consultation with industry on the draft legislation will start shortly and regulations will be laid in the autumn, with the new rules coming into force from April 6 2027.
Tom Riley, Nationwide Building Society’s group director of retail products said: “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, head of savings at the Building Societies Association (BSA) said: “We welcome the Government providing greater clarity on its proposed Isa reforms.
“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, money at Skipton Building Society said: “This consultation is a step in the right direction,” adding “but the detail now matters”.
Jeremy Cox, head of strategy at Coventry Building Society, said: “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.”
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