If you've got a Stocks and Shares ISA, there's a decent chance you've got cash sitting in it right now. Maybe you've transferred money in and haven't yet decided what to buy. Maybe you sold something a few months ago and it's just parked there. Maybe you leave a small buffer in cash because you like having that flexibility.
I've done all of those things. It felt sensible. And until now, it was sensible — because that cash earned interest completely tax-free inside the ISA wrapper, just like everything else in there.
That's about to change. And the detail that's quietly buried in this week's announcement from HMRC is one that a lot of people are going to miss.
What HMRC Just Announced
On 23rd June 2026, the government confirmed the rules around a new 22% charge that will apply to any interest earned on cash held inside a non-cash ISA — that means your Stocks and Shares ISA, your Innovative Finance ISA, or any other ISA that isn't specifically a Cash ISA.
This comes alongside the already-announced plan to cut the cash ISA allowance from £20,000 to £12,000 for under-65s from 6th April 2027. Both changes land on the same date.
So if you're holding £5,000 in cash inside your Stocks and Shares ISA after April 2027, and that cash earns 4% in interest — that's £200 of interest that would previously have been entirely tax-free. From 2027/28, HMRC will take 22% of it. That's £44 gone. Not a fortune, but it adds up — and remember, that charge is taken even though the money is sitting inside an ISA wrapper you've always been told protects everything inside it.
Why Is This Happening?
The government wants to get more people investing in the stock market rather than leaving money in cash. The thinking — contested, to put it mildly — is that too much UK savings is sitting in low-growth cash and not enough is going into UK businesses and equities.
The problem is that if they simply cap the cash ISA at £12,000 and leave it at that, some people will just work around it by parking their money in cash inside their Stocks and Shares ISA. The 22% charge is the enforcement mechanism: a deliberate deterrent designed to make holding idle cash in an investment ISA more expensive than putting it somewhere it's actually doing something.
You might think: "That's fine, I'll just put it all in a Money Market Fund instead." And here's where it gets a bit complicated.
Money Market Funds: The Partial Workaround
Money Market Funds (MMFs) are funds that invest in short-term, low-risk debt — essentially very cash-like in behaviour but not technically cash. The government has said that MMFs will NOT be caught by the 22% charge.
However, there's a catch. From April 2027, you also won't be allowed to hold 100% of your Stocks and Shares ISA in Money Market Funds. They'll need to sit alongside qualifying investments — shares, funds, ETFs, investment trusts, bonds, gilts, and so on. The intention is clearly to stop people using MMFs as a de facto cash replacement to dodge the new rule.
The fine print is still being worked out — HMRC is running a technical consultation with industry this summer, with final regulations expected in the autumn. So the exact boundaries of what's allowed will become clearer over the next few months.
What This Means for You Now
Let's be clear about what doesn't change. The overall ISA allowance remains at £20,000. You can still put up to £20,000 per year into ISAs across any combination of types — it's just that for under-65s, no more than £12,000 of that can go into a Cash ISA from April 2027.
What also changes: from April 2027, you won't be able to transfer money from a Stocks and Shares ISA into a Cash ISA if you're under 65. The reverse — moving from Cash ISA into a Stocks and Shares ISA — will still be allowed. That's a meaningful one-way gate.
If you're 65 or over, the rules are more generous. You'll keep the full £20,000 cash ISA limit, and you'll also be able to transfer freely from non-cash ISAs into cash ISAs.
The Bit That Really Surprised Me
The 22% charge applies regardless of your tax bracket. It even applies if you're a non-taxpayer.
Think about that. Under current rules, a basic rate taxpayer pays 20% tax on savings interest outside the ISA wrapper (above their Personal Savings Allowance). From April 2027, cash interest inside a Stocks and Shares ISA will be taxed at 22% — which means the ISA wrapper could actually cost a basic rate taxpayer more on that cash than if they held it elsewhere.
Simon Harrington at PIMFA, the financial advice trade body, put it bluntly:
"Far from encouraging take up, they risk making the stocks and shares Isa, the very wrapper the Government wants people to use, less attractive."
Jeremy Cox from Coventry Building Society is even more direct:
"We're moving away from a fair and straightforward Isa system... towards a more complex and confusing set of rules that will feel unfair to many consumers."
The Treasury Select Committee has also raised concerns. Chair Dame Meg Hillier has said the reforms
"risk complicating the ISA landscape and confusing consumers"
and that she remains unconvinced the changes will drive the investment culture shift the government wants.
What Should You Actually Do?
The 2026/27 tax year — the one we're in right now — is the last full year operating under the old rules. That matters.
A few practical things worth thinking about:
If you have cash sitting uninvested in your Stocks and Shares ISA, now is a good time to think about whether you actually want it there long-term, or whether it should be moved into something that's working harder.
Don't confuse your "buffer cash" with your investment pot. If you genuinely want accessible, low-risk cash savings, a Cash ISA used properly is still a very good home for it — especially while you can still use the full £20,000 allowance this tax year.
If you're approaching 65, keep in mind that you'll retain the full £20,000 cash ISA allowance from the start of the tax year in which you turn 65 — even if that birthday falls mid-year.
Watch the consultation. HMRC is finalising the regulations through autumn 2026. The exact rules around what counts as "cash", how Money Market Funds will be treated, and how providers will report and charge the 22% are still being worked through. Andrew Gall at the Building Societies Association is right that savers need "clear information and sufficient time to understand how the changes will affect them."
Final Thoughts
From 6th April 2027, a flat 22% charge will apply to interest on cash held inside Stocks and Shares ISAs — regardless of your age or tax rate.
This is part of a wider reform that also cuts the cash ISA limit from £20,000 to £12,000 for under-65s from the same date.
The charge is specifically designed to stop people using their S&S ISA as a cash ISA workaround.
Money Market Funds are exempt — but from 2027 you can't hold 100% of your S&S ISA in them.
Under-65s will lose the ability to transfer from a Stocks and Shares ISA into a Cash ISA after April 2027.
The current tax year (ending 5th April 2027) is the last full year under the old rules — worth bearing in mind when planning.
How will genuinely uninvested cash in a stocks and shares ISA that is waiting to be invested be treated, how long will it be able to sit there without being penalised, and what levels will be allowed.
Final regulations are expected in autumn 2026, so keep an eye on how the detail develops.
This article is here to give you some information and is for educational purposes only. It is not meant to give you financial advice. It is always a good idea to chat with a financial adviser who knows you well and can help you make the best decisions for your situation.
Sources
https://www.moneysavingexpert.com/news/2026/06/cash-investment-isa-reforms/
https://uk.finance.yahoo.com/news/22-charge-aims-stop-isa-144153232.html
https://www.moneysavingexpert.com/news/2025/11/cash-isa-limit-cut-martin-lewis-budget/
https://www.starlingbank.com/blog/how-to-make-the-most-of-your-isa-savings/
