UK to cap cash ISAs at £12,000 and tax uninvested funds

The UK Treasury has detailed a sweeping overhaul of its Individual Savings Account (ISA) framework, effectively penalising retail investors who hold cash rather than equities. From April 2027, adults under 65 will see their annual cash ISA allowance slashed from £20,000 to £12,000. Any uninvested cash sitting within a stocks and shares ISA will also face a flat 22% tax charge on interest earned.

The measures represent a deliberate intervention by HM Revenue and Customs to redirect domestic capital. By closing loopholes that allowed savers to use equity wrappers as de facto cash accounts, the government is pushing household money into productive investments. The policy signals a stark shift in how a major European economy manages its retail savings pool.

Under current rules, a stocks and shares ISA can hold entirely uninvested cash while earning tax-free interest. Under the new regime, providers will deduct a 22% charge on that interest before it reaches the saver. Crucially, HMRC has confirmed that standard personal savings allowances—£1,000 for basic-rate taxpayers and £500 for higher-rate taxpayers—cannot be used to offset this charge.

The Treasury is also moving to block workarounds. From 2027, investors under 65 will no longer be allowed to transfer funds from a stocks and shares ISA into a cash ISA. Furthermore, savers will be prohibited from holding 100% of their stocks and shares ISA in money market funds, low-risk products that mimic cash returns.

The changes disrupt a common investment practice. Claire Trott, the head of advice at St James’s Place, notes: "Holding cash or cash-like assets within a stocks and shares Isa is often a normal part of the investment journey. Investors may temporarily hold cash while deciding where to invest, when switching investments, or while waiting for money to be reinvested." Going forward, keeping money in cash within these accounts will trigger tax liabilities.

The flat 22% rate means higher-rate taxpayers will still pay less than they would on non-ISA savings, where the rate jumps to 42% in 2027. However, the rules eliminate the flexibility that made ISAs a popular vehicle for phased stock market entry. Investors holding large cash balances in equity ISAs will have to withdraw the funds or deploy them into assets like government bonds by 2027 to avoid the tax.

For the broader European economy, the UK’s pivot highlights a growing tension between governments seeking to stimulate equity markets and citizens clinging to the safety of cash. While investors over 65 retain the full £20,000 cash ISA allowance, younger savers face a clear legislative nudge. The era of using tax-efficient equity wrappers to hoard cash is ending.