ISA Reform 2027: What the Cash ISA and Interest Tax Changes Mean for You

The government has confirmed a significant reshaping of the ISA regime, due to take effect from April 2027. None of it changes your ISA allowance or rights this tax year, but the rules are complex enough that it's worth understanding now, before decisions you make in 2026 lock you into a less favourable position later.

What's changing

From April 2027, the Cash ISA allowance will fall to £12,000 a year for savers under 65, while Stocks and Shares and Innovative Finance ISAs keep their £20,000 limit. Savers aged 65 and over keep the full £20,000 Cash ISA allowance. Existing Cash ISA balances aren't affected — the lower limit only applies to new money paid in from April 2027 onward, according to GOV.UK's ISA reform factsheet.

A second change is more unusual: from April 2027, interest earned on cash held inside a Stocks and Shares or Innovative Finance ISA will be taxed at 22%. Previously, cash sitting inside an investment ISA — say, while you decide what to buy — grew tax-free like everything else in the wrapper. That protection is being removed for cash specifically, and it applies to everyone, including those 65 and over.

Under-65s will also lose the ability to transfer money from a non-cash ISA into a Cash ISA from April 2027, though transfers the other way — Cash ISA into Stocks and Shares ISA — will still be allowed. This restriction lifts once you turn 65.

Cash-like assets held in non-cash ISAs will be redefined as Money Market Funds only, and must be a partial allocation rather than the entire portfolio.

Separately, the Lifetime ISA is being phased out in favour of a new First-Time Buyer ISA from April 2028, which is expected to drop the current 25% early withdrawal penalty. Existing LISA holders can keep contributing in the meantime.

Why the government is doing this

The stated aim is to nudge savers toward investing rather than parking money in cash, on the view that too much household wealth sits in low-growth cash savings. Whether that succeeds, or simply pushes people into products that don't suit their risk appetite, is genuinely disputed among commentators — worth watching rather than assuming either way.

How the UK compares

The US doesn't have a direct equivalent to the ISA. The closest comparison is the Roth IRA, but UK savers can currently pay in £20,000 a year across ISAs versus roughly $7,000 (or $8,000 over 50) into a Roth IRA — a large gap that persists even after the 2027 changes. The Roth IRA does allow indefinite annual contributions with no lifetime cap on the number of years you can pay in, which is broadly the same as the ISA's rolling annual allowance.

What to do now

• If you hold cash inside a Stocks and Shares ISA, plan to either invest it or move it out before April 2027, since it will start being taxed
• If you're under 65 and might want to shift Cash ISA savings into investments later, doing that before April 2027 avoids the new transfer restriction working against you the other way
• If you're close to 65, note that some restrictions (Cash ISA allowance, transfer rules) ease once you cross that threshold
• Don't open or close ISAs purely in reaction to 2027 rules that are still over a year away — your day-to-day allowance and rights are unchanged for now

Key Numbers

• £12,000 — new Cash ISA allowance for under-65s from April 2027
• £20,000 — allowance retained for Stocks & Shares ISAs, Innovative Finance ISAs, and Cash ISAs for over-65s
• 22% — tax rate on interest earned on cash held inside non-cash ISAs from April 2027
• April 2028 — planned launch of the First-Time Buyer ISA replacing the LISA

Sources

• GOV.UK: ISA reform 2027 — anti-circumvention rules factsheet
• MoneySavingExpert: Cash held in stocks and shares ISAs to be hit with 22% charge
• Tembo Money: Government update on the Lifetime ISA
• Up The Gains: Roth IRA UK equivalent

Educational content only — not financial advice.