Significant changes to Individual Savings Accounts (ISAs) have been announced, set to take effect from April 2027. Under new government proposals revealed by Chancellor Rachel Reeves in the Autumn Budget, the annual ISA allowance will be split between cash and stocks and shares, with new charges introduced for certain account holders.
These reforms are designed to encourage greater investment in equities over holding cash, impacting hundreds of thousands of savers below the age of 65.
Financial commentator Martin Lewis has raised concerns over the new rules, highlighting key points which remain unclear and could influence how many people manage their savings in future.
Overview of ISA Tax Reforms
ISAs are widely used by UK savers due to their tax-free status. Currently, individuals can deposit up to £20,000 annually in total, dividing this amount between cash ISAs, stocks and shares ISAs, and innovative finance ISAs as they choose.
The changes outlined in the most recent Budget propose a reduced limit on cash ISAs, allowing up to £12,000 per year to be placed in any ISA type. The remaining allowance must be invested exclusively in stocks and shares ISAs.
These altered thresholds are set to apply from April 2027, affecting savers under the age of 65.
Government’s Position on ISA Allowances
The Treasury has stated that the measures aim to stimulate investment into UK companies and the wider economy, rather than encouraging savers to keep funds in lower-yielding cash products. Individuals over 65 will continue to be eligible for the full £20,000 flexible ISA allowance.
In official documents, the government explained that the new allocation ‘encourages longer-term investment in equities’, while preserving support for those close to or in retirement.
New HMRC Charge on Cash in Investment ISAs
A key component of the reform is the introduction of a new tax charge on interest earned from cash held within stocks and shares ISAs, as well as innovative finance ISAs.
The government has expressed concern that some savers use these investment platforms to shelter cash, benefiting from tax-free status without actually investing in shares or equivalent eligible assets.
According to the official government newsletter on tax-free savings (published November 2025), this new HMRC charge is intended to discourage ‘circumvention of the lower limit for cash ISAs’.
Clarification and Remaining Questions
Martin Lewis, a highly regarded financial expert, spoke about the proposed changes on his BBC podcast. He described the government’s approach as an attempt to ensure ISA allowances are used for their intended purpose of investment, rather than simply holding cash.
‘The government is trying to get people to hold money in shares more than in cash, so it has cut the cash ISA limit,’ Lewis said. He also pointed out ambiguity over how the new tax charge would be applied, and called for clearer guidance:
‘There are some dangers here, because if you want to take your money out of the market for a certain period...it seems pretty unfair that you would have a tax charge.
My suspicion is there will be a consultation on exactly how they do it and how long you have to be holding cash for it to be taxed, and what the tax will be.’
Further Restrictions Planned for ISAs
From April 2027, additional measures are expected to further restrict the movement of funds between ISA types. The planned rules will prohibit transfers from stocks and shares or innovative finance ISAs back into cash ISAs, in order to reinforce the separation between investment and cash savings.
The Treasury also intends to implement stricter ‘eligibility tests’ to define which investments can be held in stocks and shares ISAs, excluding any ‘cash-like’ holdings from qualifying for the tax advantages expected of equities and related instruments.
Final Summary
The newly announced ISA reforms, due to take effect in April 2027, represent a significant shift in the UK’s approach to tax-free saving and investing.
By lowering the cash ISA allowance for under-65s and introducing a targeted HMRC charge for holding cash within investment ISAs, the government seeks to direct more capital into shares and peer-to-peer investments. However, the exact workings of the new tax rule are yet to be finalised, and industry consultation is expected.
Savers are advised to stay informed and review their ISA strategies as more details emerge. For further updates on tax and policy changes, Pie app users can access the latest guidance within the financial news section.
