In her 2025 Budget, Chancellor Rachel Reeves announced an important change to the Cash ISA limit, set to come into effect from April 2027.
At the time, there were questions about exactly how this would work in practice, and some potential loopholes that existed in the proposed law. As such, it was difficult to know precisely how you might be affected by the change.
Fortunately, the government recently confirmed important points, particularly in relation to the tax treatment of cash held in a Stocks and Shares ISA.
This article will outline what the rules are currently, how things are changing, and the clarifications the government made.
The Cash ISA limit is falling to £12,000 for under-65s from April 2027
Your ISAs are tax-efficient savings and investment accounts. There are several types you might use, including a Cash ISA, which functions much like a standard savings account, and a Stocks and Shares ISA, which allows you to invest.
Under the current rules, you can deposit up to £20,000 across all your adult ISAs each year, and you’re free to split it how you like. Any interest you earn from wealth in a Cash ISA is tax-free, and there is no Capital Gains Tax (CGT) or Dividend Tax on investment returns from a Stocks and Shares ISA.
You won’t pay Income Tax when withdrawing funds from an ISA either.
However, from April 2027, under-65s will only be able to put up to £12,000 in a Cash ISA each year. You will still have an overall allowance of £20,000, but the other £8,000 will be reserved for different types of ISAs.
Over-65s will see no change and continue using the £20,000 allowance as they see fit.
The government hopes this will encourage more people to invest instead of holding large amounts of cash. But there are important questions about what happens to cash that is held in a Stocks and Shares ISA.
The government announced anti-circumvention rules meaning cash in a Stocks and Shares ISA will be subject to tax
One potential loophole in the new rules was that you can hold cash in a Stocks and Shares ISA and generate interest. There were questions about whether this would count towards your Cash ISA limit or if this could be used to hold more cash.
The government confirmed it would introduce anti-circumvention rules to prevent this.
From April 2027, when the limit changes, there will be a flat rate of 22% tax charged on any interest generated from cash held in a non-Cash ISA. This will be paid directly to HMRC by your ISA fund manager.
Crucially, this tax will apply to everybody, regardless of their tax bracket. You also won’t have a Personal Savings Allowance (PSA) – allowing you to generate a certain amount of tax-free interest – applied to cash in a non-Cash ISA.
Portfolios made up of 100% cash-like assets will be considered non-qualifying investments
As well as charging interest on cash held in a Stocks and Shares ISA, the government plans to limit your ability to hold an entire portfolio of cash-like assets in an investment account. They define these as money market funds, which are low-risk and highly liquid.
If you have part of your portfolio dedicated to these, while you also invest in stocks and shares and other types of investments, you reap the tax benefits of your ISA. However, if 100% of your portfolio consists of cash-like assets, you will no longer qualify and will be subject to tax on your investment returns.
Transfers from non-Cash ISAs into Cash ISAs will be restricted
Before April 2027, you are free to move funds between your ISAs however you please. But after the planned changes, you will no longer be able to move funds from a non-Cash ISA into a Cash ISA.
This is to stop you from depositing the wealth in a Stocks and Shares ISA – meaning you wouldn’t use any of your £12,000 Cash ISA limit – and then moving it back into a cash account.
You will be able to move wealth the other way, from a Cash ISA into other types of ISAs.
Certain rules will still apply even if you’re over 65
From the beginning of the tax year in which you turn 65, the new Cash ISA limit will no longer apply to you, and you’ll be able to use the £20,000 ISA allowance in any way you choose, as you can now.
Despite this, some of the anti-circumvention rules will still apply to you.
The restriction on transferring funds between ISAs will be lifted, but you’ll still pay 22% tax on any interest from cash in a Stocks and Shares ISA. A portfolio made up of 100% cash-like assets will also fail to qualify for the tax benefits of an ISA.
You may need to review your investment portfolio in light of these changes
If you find yourself on the wrong side of anti-circumvention rules after the changes come into effect, you could pay more tax than you expected.
We can help you review your investment portfolio and make any necessary adjustments to avoid this.
Please get in touch to find out how our team of VouchedFor Top Rated planners can help today.
Please note
This article is for general information only and does not constitute advice. The information is aimed at individuals only.
All information is correct at the time of writing and is subject to change in the future.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate tax planning.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.