The ISA has rested on a single, simple promise: funds held within it grow free of income tax and capital gains tax. That promise has become considerably more complicated. On 23 June 2026, HMRC published its 'ISA reform 2027: anti-circumvention rules factsheet'.
From April 2027, the Cash ISA allowance will be reduced to £12,000 for savers under 65, while the Stocks and Shares and Innovative Finance ISA allowance remain at £20,000. This was announced in the Autumn 2025 budget as a means of ‘encouraging retail investment and support better returns for savers.’ The anti-circumvention rules published this week are intended to make sure those reforms achieve that aim.
If implemented in their current form the proposals would be:
• A 22% charge on interest paid on cash held in non-cash ISAs
• Non-cash ISAs comprised of 100% cash or cash-like assets (specifically money market funds) will be 'non-qualifying' investments
• Transfers from non-cash ISAs to cash ISAs will not be permitted for those under 65
A technical consultation is due to begin shortly, so the details are likely to evolve.
You can find the full factsheet here.
Moving on from the facts, I thought it useful to share my thoughts on the likely impact of the policy and the anti-circumvention rules.
I would start by saying the underlying concern is legitimate; too few people are investing, and the gap between cash savings and market participation is real and needs to be addressed. Research from the Social Market Foundation (“SMF”) shows only 8% of household wealth is held directly in equity investments, which is the lowest in the G7, whilst the amount of savings in cash or low-interest accounts, beyond emergency savings, is £430 Billion, as a proportion of household wealth we rank 3rd in the G7.
SMF claim this comes down to low financial literacy, behavioural biases, the complexity of the UK retail investing landscape, and over two-thirds of UK households having insufficient funds to cover three months’ worth of expenditure.
Now, my thoughts on the policy and anti-circumvention rules as a means of tackle the issue:
The stated aim is to encourage movement from cash into markets. But the mechanism, reducing the allowance and adding a tax charge, addresses supply constraints rather than the actual barriers to investment: confidence, accessibility, trust, and financial literacy.
A quote I saw this week in MoneyWeek from Greg Davies sums this up well:
"People move from cash into markets when the journey feels clear, safe enough, and matched to their goals, time horizon, and financial circumstances. Adding tax charges and transfer restrictions to an already confusing ISA system sends precisely the wrong behavioural signal"
The charge seems to apply universally, regardless of age, income, available allowances, or tax bracket, including to non-taxpayers, who will face a 22% charge on interest that would otherwise more than likely be entirely tax-free. For basic-rate taxpayers, it exceeds their marginal rate; for higher-rate (40%) and additional-rate (45%) taxpayers, it falls below it.
Of the 11 million people who subscribed to any ISA in 2024-25, only 3.9 million contributed more than £10,000, just 5.6% of the UK population. The charge will affect a subset of that subset.
The additional revenue this charge could realistically raise is limited. Based on prior-year savings statistics and a Bank of England rate of 3.75%, the charge would generate approximately £122 million per annum on roughly £756 millions of interest from about £20 billion held in cash within stocks and shares ISAs.
In return for the revenue, we are creating a more complex environment which I believe is likely to create inertia. The risk is not that savers abuse the rules; it is that they disengage entirely from ISAs. By eroding the integrity of a straightforward tax wrapper, it would be entirely natural for people to be concerned about ‘scope creep’. We have already seen that the current government believes it is in the ‘public interest’ to mandate asset allocation in pensions.
The common reasons I have found people hold cash are either due to strategic asset allocation, planned expenditure, or simply a safety net by preventing transfers for under 65s from non-Cash ISAs to Cash ISAs, you are unnecessarily putting them in a position where they may have to withdraw from the ISA entirely or pay the tax charge, both of which may produce unnecessary administrative work or disadvantage those who are not holding a ‘flexible’ ISA which allows them to replenish their ISA.
As currently described, the proposals appear capable of being avoided by holding money market funds as opposed to cash, thereby not attracting the 22% charge on interest from cash, and as long as the ISA is not entirely made up of money market funds the ISA appears to remain qualifying. Whether that remains possible will depend on the drafting following consultation.
If the policy aim of reducing the cash ISA allowance is to encourage retail investment, why does it exempt those aged 65 and over, allowing them to retain a £20,000 cash ISA allowance?
The exemption appears to recognise that the suitability of investment is influenced by age, risk tolerance and time horizon. If that is accepted for those over 65, it is less obvious why younger investors with imminent spending needs e.g. house purchases should be denied equivalent flexibility.
They more suitably tackle this concern by permitting transfers from non-Cash ISAs to Cash ISAs.
Unfortunately, the bigger issue is with life expectancy continuing to rise and retirement ages broadly static, remaining appropriately invested in later life has never been more important. The exemption reflects political sensitivity rather than any coherent investment philosophy, and it sits awkwardly alongside the policy's own stated rationale.
All is not lost however, with the release of the anti-circumvention rules the government has stated they will now undergo a consultation period, this provides an opportunity to address the concerns flagged above and ultimately try to find a solution to low market participation that meaningfully changes behaviour rather than simply penalising those who haven't yet made the leap.
If the objective is genuinely to increase long-term retail investment, policy should focus on reducing behavioural barriers rather than introducing additional tax distinctions within the ISA regime. Simpler products, clearer guidance, improved financial education and greater confidence in the stability of ISA rules are more likely to encourage participation than narrowing the availability of cash.
Sources:
HM Revenue & Customs (HMRC), released 18 September 2025, Gov.UK website, Annual savings statistics 2025.
Office for National Statistics (ONS), released 27 November 2025, ONS website, Provisional population estimate for the UK: mid-2025
Salutin, G. and Gibson, J.A. (2025), Social Market foundation released November 2025, A nation of small investors: Increasing the proportion of British households actively investing.
Shoffman, M. (2026). What the cash ISA reforms mean for you as Treasury confirms new interest charges
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