New rules for holding cash in ISAs: Three things investors need to know

The government will cut the Cash ISA allowance in April 2027 to £12,000 from its current £20,000 for investors under age 65. While this was revealed during the 2025 Budget, the nuances of what this will look like in practice for investors have now come to light.

When the new Cash ISA rules come into practice, Brits will need to invest the other £8,000 in a non-Cash ISA, such as a Stocks and shares ISA, in order to use their full allowance. The main rules that have been confirmed for investors include:

1. A 22% charge will be applied to interest made on cash that’s held in an investment ISA. This is a flat rate charge, meaning the same rate applies whether the ISA account holder is a basic rate taxpayer, higher rate taxpayer, or indeed doesn’t pay any income tax.
2. The ISA holder cannot invest 100% of their (non-cash) investment portfolio in cash-like assets (money market funds), or that would be classed as a ‘non-qualifying’ investment. This means they could invest 99% in money market funds and 1% in, say, UK equities and that would be allowed.
3. Transfers from non-Cash ISAs to Cash ISAs for under 65-year-olds will not be permitted.

In practice, this means that investors can still have a portfolio that is largely focused on cash or cash-like investments, it will just take a slightly different form through money market funds instead of the accounts that would be available in a Cash ISA.

Let’s work through what this means for two different investors: John, aged 67, and Kerry, aged 45.

Because John is over age 65, he will be able to keep investing his entire £20,000 allowance in a Cash ISA each year if he pleases. If he currently has most of his savings in a Stocks and shares ISA and would like to move that money to a Cash ISA, he is also able to do that.

If Kerry wants to invest through cash, her strategy will need to be a bit more complex. She will be able to invest £12,000 in a Cash ISA if she pleases. To use the rest of her allowance, it will need to technically be invested instead of held in a cash account.

However, Kerry can use a money market fund to produce returns and a risk level similar to cash with most of the invested money through a Stocks and shares ISA.

Money market funds are investment funds that aim to create returns slightly above the rate of cash through investing in short term company and government debt. The new rules state that Kerry cannot hold 100% of her Stocks and shares ISA in money market funds, so she’d need to pick at least one other investment as well. She might choose to put £25 in a UK equity fund, and the other £7,975 in a money market fund. This would mean almost all her money is held in a cash-like product.

Q&A

Once I turn 65, will I be able to put 100% of my ISA allowance in a Cash ISA, or is that just for people who are already 65?

All investors will have access to the full £20,000 Cash ISA allowance once they turn 65. This will apply from the start of the tax year in which an individual turns 65.

Can I still put my entire £20,000 allowance in a Cash ISA this year?

Yes, you will be able to use your full allowance in a Cash ISA until the rule comes into effect for the new tax year on 6 April 2027. 

What counts as a cash-like asset?

Only money market funds will be considered a cash-like asset. Other lower-risk investments like gilts or investment grade corporate bonds won’t be considered cash-like assets.

Will the dividends paid into my Stocks and shares ISA face a charge? 

The government hasn't made an explicit statement on how dividends will be dealt with when paid into a Stocks and shares ISA. Based on the information we have now, any interest earned on that dividend would face the 22% charge. However, if you reinvest that dividend before it starts accumulating interest or if it is transferred out of your ISA soon after being paid, it is likely to avoid that charge. 

Can I still transfer money from my Cash ISA to my Stocks and shares ISA?

Yes, you can still transfer into a Stocks and shares ISA from a Cash ISA, but you won’t be able to reverse this later.

Will I be able to use my £1,000 personal savings allowance to cover the 22% tax if I had cash interest in a Stocks and shares ISA?

This is a different than the typical tax you'd see if you held cash outside of an ISA (where basic rate tax payers enjoy a £1,000 allowance, those on the higher rate £500 and additional rate payers nothing), and is instead a flat rate charge, so you wouldn’t be able to use your allowance.