New 22% charge on cash in investment ISAs

At a glance

• A flat rate 22% charge will apply on the interest on cash held in investment ISAs.
• Money market funds held in an ISA won’t be classified as cash, and won’t be liable to the 22% charge, provided they don’t make up 100% of the ISA.
• A simpler first-time buyer ISA will be launched to replace the lifetime ISA. It will pay a government bonus, but there will be no exit penalties.

The government has announced a 22% charge on the interest on cash savings held within non-cash ISAs, including stocks and shares ISAs and innovative finance ISAs, from April 2027.

ISA providers and investors have been calling for government to give clarity on the treatment of cash holdings in non-cash ISAs. It follows the announcement in the Budget in November last year of a reduction in the annual tax-free cash ISA allowance for the under-65s from next April.

The government has also unveiled a simplified ISA for first-time buyers, which will replace the lifetime ISA. The first-time buyer ISA will continue to pay a bonus on savers’ money and will remove the exit penalty, for those who choose not to use the proceeds for a house purchase.

From April 2027, the annual tax-free cash ISA allowance will fall to £12,000 for savers under 65. The annual limit for stocks and shares ISAs and innovative finance ISAs will remain at £20,000. The annual cash ISA allowance for those aged 65 and over will remain at £20,000.

But until this week the government had not outlined how uninvested cash held within an investment-based ISA, such as stocks and shares and innovative finance ISAs, would be treated under the new rules.

In a report published on 23 June, HM Revenue and Customs (HMRC) confirmed there will be a 22% charge on interest earned on any cash holdings in a non-cash ISA from April next year.

The 22% charge on cash in investment ISAs will apply universally to all ISA account holders, regardless of their age and their income tax bracket. It will also apply to ISA savers who are non-taxpayers.

Explaining the new charge, HMRC said it would ‘minimise the opportunity for the lower cash ISA limit to be circumvented, while preserving the flexibility needed for legitimate investment activity within non-cash ISAs’.¹

In addition, HMRC has confirmed that partial allocations of money market funds (and other cash-like assets) held in an investment ISA can continue to be treated as non-cash under the new rules from next year. But this is provided these funds do not make up 100% of the non-cash ISA account and holdings.

This is something that had previously caused confusion and concern among ISA providers and investors.

Government has also tightened up the rules on transferring ISA funds. From April 2027, if an investor is under the age of 65 it will not be possible to transfer funds built up in non-cash ISAs, such as a stocks and shares ISA, into a cash ISA. However, transfers in the opposite direction will still be allowed.

First-time buyer ISA to replace lifetime ISA and remove exit penalties

The government has announced plans for a new, simpler first-time buyer ISA to replace the lifetime ISA (LISA).

In a consultation document², published this week, the Treasury unveiled its proposals for the new savings product. It will be available for first-time homebuyers over 18. Money can be saved in cash or stocks and shares.

Unlike the LISA there is no maximum age limit for the first-time buyer (FTB) ISA, and there is no retirement savings feature. There also won’t be a penalty for withdrawing money. In contrast, with the LISA, there is a 25% withdrawal penalty.

There have been growing calls for a replacement to the LISA for many years. Last year the cross-party Treasury Committee published a report which found the design of the LISA was flawed. It highlighted the dual-purpose design (for first-time buyers or for retirement savings) increased the risk of savers choosing unsuitable investment strategies, and the withdrawal charge was confusing.³

The FTB ISA will include a government bonus paid only at the point the saver makes a withdrawal to buy their first home. The bonus will only be paid on contributions into the ISA, not on any interest earned or investment growth.

The bonus is only paid at the point the saver withdraws the money to buy a property, not annually. The government says this removes the need for a withdrawal charge because the saver can withdraw funds at any time, should their circumstances change, and they won’t have received a government bonus which need to be clawed back.

As with the LISA, the FTB ISA will have a maximum saving limit each tax year, which will count towards their total annual ISA allowance. There will also continue to be a price cap set for eligible home purchase. But the final details have yet to be drawn up.

LISAs pay a 25% bonus on up to £4,000 of savings per tax year. This is paid every year up until the saver is 50. The property price cap for first-time buyers using the proceeds of a LISA to buy a first home is £450,000 across the UK.

The new first-time buyer ISA will eventually replace the LISA. But lifetime ISAs remain available to new savers until then.

The government is appealing for responses to its consultation, particularly from LISA savers, and those who may be interested in the new first-time buyer ISA. The consultation closes on 17 August 2026.

The tax treatment of ISAs may be subject to changes in legislation in the future. 

Please note that Cash and Lifetime ISAs are not available through St. James’s Place.

Sources

¹HM Revenue and Customs. ISA reform 2027: anti-circumvention rules factsheet – 23 June 2026
²HM Treasury. First-time buyer ISA: Consultation. 22 June 2026
³Treasury Committee. Lifetime ISA report – 30 June 2025.

SJP Approved 24/06/2026