With a major change to ISAs due, savers and advisers have been nervously awaiting the final details, and they are, as widely feared, beset with complexity and a 22% tax trap.

From 6 April 2027, the government will slash the Cash ISA allowance to £12,000 from the current tax free £20,000, except for over 65s who will still have the old allowance from their 65th birthday.

 

The big change from next year is the decision to maintain the limit for stocks and shares and Innovative Finances ISA (non cash ISAs) at £20,000 to encourage retail investors to use them, but the Treasury does not want money held in these accounts simply as a tax wrapper and not being invested.

 

Now HMRC has confirmed the new rules, albeit no draft legislation yet, with the introduction of a ‘three core anti-circumvention rules’, in other words to prevent any potential tax avoidance opportunities.

HMRC stressed: ‘The new rules will 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.’

 

The three core anti-circumvention rules are:

• cash held in non-cash ISAs will be subject to a 22% flat rate tax charge on any interest or alternative finance return paid;
• ‘cash-like’ assets – defined as money market funds only – will be classed as non-qualifying investments in stocks and shares ISAs where they make up 100% of the investment portfolio;
• transfers from non-cash ISAs to cash ISAs for under 65-year-olds will not be permitted. It will remain possible to transfer from a cash ISA to a non cash ISA.

 

However, the technical consultation is not yet available and the latest HMRC update is simply called a factsheet, outlining the rules in brief, no doubt a response to intense pressure on the Treasury to confirm the rules after they were first trailed at the Budget last November.

 

‘A technical consultation with industry on the draft legislation will commence shortly,’ HMRC confirmed.

 

The government’s approach has been met with criticism for its undue complexity.

 

Pre-election promises signalled the chancellor’s ambition to simplify ISAs and boost retail investing. Consumers could have been granted the freedom to move seamlessly from saving to long-term investing had government scrapped the arbitrary distinction between cash and stocks & shares ISAs.

 

Unfortunately, the opportunity for radical simplification has been missed.

 

Rather than minimise friction between saving and investing, these reforms reduce flexibility, entrench the divide between cash and investment accounts, and introduce tax charges and complex age-related allowances.’

Under the new rules, although individuals aged over 65 will be able to transfer between cash and non-cash products and will have a higher allowance, they will be charged the 22% tax on interest earned on cash in non cash ISAs and will also be covered by the ban on 100% cash-like investments.

 

Investors seeking to de-risk in the near future will likely be prompted to switch to cash prematurely before the chancellor pulls up the drawbridge on transfers between cash and investments.’

 

Whether the new regime will encourage safe ISA savers to try out riskier options is questionable, particularly with the tax dangers.

 

If we are trying to encourage people who were previously saving 100% in cash to move to investing, we need to do so in a responsible way.

 

That is likely to mean diversification, with clients holding some lower risk assets, at least at outset.

 

Trying to force someone from very low risk straight to medium/high risk assets could easily be counterproductive and instead will likely push people to hold any excess above the £12,000 cash ISA savings, in a simple bank account or fixed-term deposit outside an ISA wrapper. This feels an ill-thought out and poorly researched concept, with no likelihood that it will achieve the policy intent.’

 

Legislation will be introduced in the autumn, hopefully before the Budget to give enough time for advisers and institutions to communicate these complex changes with investors and saver, but no timetable has been given by the government.

 

Useful links

 

Treasury refutes ‘nonsense’ 22% tax on stocks & shares ISAs claim | 2 Jun 2026

 

Potential tax consequences of cap on ISA allowances | 17 Mar 2026

 

Government pushes stocks & shares ISAs with a squirrel | 27 Apr 2026

 

HMRC ISA reform 2027: anti-circumvention rules factsheet, issued 23 Jun 2026