Here’s what the new ISA changes could mean for you

When Chancellor Rachel Reeves delivered last year’s Budget, the headline ISA announcement was easy to overlook among bigger-ticket items. But the changes taking effect from April 2027 will affect how millions of people save and invest, and if you hold significant assets in cash, they’re worth understanding now.

From April 2027, anyone under 65 will see their annual cash ISA allowance cut from £20,000 to £12,000. The overall ISA allowance stays at £20,000, meaning you’ll still be able to save and invest that amount in total each year. The changes mean that to use your full allowance, at least £8,000 will need to go into a stocks & shares ISA. Remember that there are risks with investing and you could lose money.

The government’s aim is to nudge more people away from holding large sums in cash and towards longer-term investment. For many savers, this may change the strategy on how you structure your ISA holdings going forward.

If you’re 65 or over, the full £20,000 cash ISA allowance remains unchanged, and you’ll retain the flexibility to transfer freely between cash and stocks & shares ISAs. For everyone else, some transfers now come with conditions.

Whenever any new rules come into force, attention turns to how financial planners and investors intend to mitigate their impact. There have been a number of points of discussion for this particular change, such as the treatment of ‘cash-like’ investment funds, or cash held within a stocks & shares ISA. Much of this detail has now been revealed.

The 22% charge on cash in investment ISAs

HMRC has introduced a measure that applies regardless of age, with a flat 22% charge on interest earned from cash held within a stocks & shares ISA.

This is a significant change, as holding cash within an investment ISA is a routine part of investing. Cash may sit in an ISA while you wait to redeploy it, after receiving dividends, when switching between funds or when you want to temporarily reduce market exposure. Investors will need to be more aware of their cash positions in order to limit exposure to this new tax.

Where money market funds sit

One area where HMRC has taken a more measured approach is money market funds. Money market funds invest in short-term instruments such as Treasury bills and certificates of deposit. They offer daily liquidity, very low risk, and returns that closely track cash rates, making them a practical tool for investors who want to stay liquid without taking on stock market volatility.

There had been concern that the regulator would classify a broad range of cash-like assets as prohibited, but the final rules are more proportionate.

HMRC has defined ‘cash-like’ assets as money market funds only, and these funds will remain eligible within stocks & shares ISAs. The only restriction is that they cannot make up 100% of the portfolio. Provided they sit alongside other investments, investors can hold a substantial portion of their ISA in money market funds without triggering the 22% charge.

Investors who previously held uninvested cash within an ISA are likely to look at money market funds as an alternative, which could be a sensible option to earn a return on capital that isn’t immediately deployed, without incurring the new tax charge.

For most investors, the immediate action is awareness rather than urgency, as the April 2027 implementation date gives you time to plan. But there are a few things worth considering now.

If you’re under 65 and currently maximise your cash ISA each year, you’ll need to decide what to do with the remaining £8,000 of your allowance. It’s important to keep in mind that a stocks & shares ISA doesn’t have to mean high-risk investing, as cautious portfolios, multi-asset funds and money market funds can all sit within the wrapper.

If you hold a significant amount of uninvested cash within an existing stocks & shares ISA, it’s worth reviewing that position in light of the new 22% charge on interest. In many cases, moving that cash into a money market fund will be a simple and effective solution, but a review of the ISA and your wider financial position could add further value.

If you’re 65 or over, the changes don’t directly affect your allowances, but the broader direction of travel is worth noting as you think about long-term ISA strategy and estate planning.

These changes make the ISA regime more complicated and slightly less flexible. A product that built its appeal on simplicity is gradually becoming harder to navigate, particularly for those with more complex financial lives.

That said, the fundamentals remain intact. ISAs are still one of the most powerful tax-efficient savings vehicles available to UK investors, and their position in many portfolios likely won’t change. The rules around how you use that shelter have just become a little more involved.

If you’d like to talk through how these changes affect your specific situation, we’re here to help. You can book an appointment or speak to your usual Evelyn Partners contact.