Over the past few months, there has been considerable media coverage about changes to Individual Savings Accounts (ISAs). As is often the case, the headlines have created more questions than answers.

The Government has published draft legislation and confirmed its intention to introduce a number of reforms, which are expected to take effect from 6 April 2027, subject to the regulations being finalised. The aim is to encourage more people to invest for the long term, while still allowing savers to hold cash where appropriate.

This update explains what has changed, what hasn’t, and what it could mean for you.

 

At a Glance

The key points

✔ The overall ISA allowance remains £20,000.

✔ Most of the new rules begin on 6 April 2027.

✔ If you are under 65, the maximum you can contribute to a Cash ISA each year will reduce to £12,000.

✔ Existing ISAs remain fully protected.

✔ Stocks & Shares ISAs continue to offer tax-free investment growth and tax-free dividends.

✔ Most investors will not need to make any immediate changes.

 

Why are ISAs changing?

The Government believes that too much money is currently being held in cash rather than invested for long-term growth. The reforms are intended to encourage greater investment while still allowing people to keep an appropriate level of cash for short-term needs.

Whether or not you agree with the policy, these reforms are expected to come into force from 6 April 2027, subject to the regulations being finalised, so it is worth understanding how they may affect your financial planning.

 

The annual ISA allowance remains unchanged

The overall annual ISA allowance remains £20,000. This means you can still save or invest up to £20,000 each tax year within ISAs without paying Income Tax or Capital Gains Tax on your investments.

 

Changes to Cash ISAs

From 6 April 2027, if you are under the age of 65, you will be able to contribute a maximum of £12,000 each tax year into Cash ISAs.

If you are 65 or over, you will continue to be able to contribute up to £20,000 into Cash ISAs each year.

 

Example

Laura is 45 and currently saves £15,000 each year into a Cash ISA.

From April 2027 she will only be able to contribute £12,000 into a Cash ISA. If she wishes to use her full £20,000 ISA allowance, the remaining £8,000 could be invested into a Stocks & Shares ISA or another qualifying ISA.

 

Holding cash within a Stocks & Shares ISA

Many investors temporarily hold cash within their Stocks & Shares ISA while deciding where to invest. This will still be permitted.

However, from 6 April 2027, if that cash earns interest, a flat-rate 22% charge is expected to apply to the interest earned. The charge will be deducted automatically by your ISA provider, you will not need to declare the interest to HMRC, and your Personal Savings Allowance cannot be used to offset the charge.

The purpose of this change is to discourage Stocks & Shares ISAs from being used as long-term cash savings accounts rather than investment accounts.

 

Money Market Funds and cash-like investments

The Government is also introducing new rules to prevent Stocks & Shares ISAs being invested entirely in cash-like assets.

From April 2027:

• Money Market Funds will be classed as cash-like assets.
• You can still hold Money Market Funds as part of a diversified investment portfolio.
• However, an ISA invested 100% in Money Market Funds will no longer qualify as a Stocks & Shares ISA.

For most investors, this change is unlikely to have any practical impact.

Importantly, the following investments are not classed as cash-like assets:

• Individual shares
• Investment funds
• Investment trusts
• Exchange Traded Funds (ETFs)
• Corporate bonds
• Government bonds, including UK Gilts

 

ISA transfer rules

From 6 April 2027, you are expected to continue to be able to transfer money from a Cash ISA into a Stocks & Shares ISA. If you are under 65, you are expected no longer to be able to transfer money from a Stocks & Shares ISA or Innovative Finance ISA back into a Cash ISA. From the tax year in which you turn 65, this restriction is expected to cease.

What’s confirmed – and what’s still to come?

Although the broad policy has been announced, the detailed regulations are still being finalised following consultation with the financial services industry. Some technical aspects of how providers implement the rules may change before the legislation is fully in force.

What should investors consider before April 2027?

• If you expect to continue holding significant cash savings, you may wish to maximise Cash ISA subscriptions before the new rules begin.
  • Investors who regularly keep large cash balances inside Stocks & Shares ISAs may wish to review whether this remains appropriate.
  • No immediate action is required, but it may be sensible to discuss your ISA strategy during your next financial review.

Do I need to do anything?

For most people, the answer is no. The current ISA rules remain in place until 5 April 2027, so there is no need to make rushed decisions. If your savings and investments are already aligned with your long-term financial goals, these reforms are unlikely to require immediate action. As always, financial decisions should be based on your own circumstances rather than reacting to newspaper headlines.

 

My View

One thing I’ve learned over the years is that governments come and go, tax rules change and new legislation is introduced, but the fundamentals of good financial planning remain the same. Making the most of your available tax allowances, maintaining a well-diversified portfolio and keeping your plans under regular review with your adviser will always be important.

A good financial plan shouldn’t need rewriting every time there’s a Budget or a change in government. Instead, it should be flexible enough to adapt to new legislation while keeping you focused on your long-term goals with us working together and be able to adapt to any changes in your own personal circumstances.

We’ll continue to keep a close eye on these ISA changes and any further developments. If we believe there is anything you should be doing, we’ll let you know. In the meantime, if you have any questions or would simply like to review your existing ISAs and investments, please don’t hesitate to get in touch with your adviser.

 

By Vanessa Taylor, Independent Financial Adviser, Strategic Solutions