A 22% levy is set to be introduced on interest earned from cash held in stocks and shares Isas to prevent savers getting around new cash Isa limit rules from 2027.
At the autumn budget 2025, it was announced that from April 2027, the annual cash Isa allowance would be reduced to £12,000.
The limit for stocks and shares and innovative finance Isas (non-cash Isas) will remain at £20,000, alongside moves to encourage an investment culture.
The cash Isa allowance for people aged 65 and over will remain at £20,000.
A factsheet placed on the HM Revenue and Customs (HMRC) website said rules will be introduced to ensure the policy achieves its objective.
Rules will be introduced to prevent people subscribing up to £20,000 cash in a non-cash Isa and leaving it there long-term, earning tax-free interest.
The rules also aim to stop people subscribing £20,000 to a non-cash Isa and then transferring those funds to a cash Isa, or subscribing £20,000 to a non-cash Isa and use the funds to purchase “wholly cash-like” investments.
Among the changes, there will be a flat rate charge (22%) on interest or alternative finance return paid on cash held within a non-cash Isa, HMRC said.
Simon Harrington, head of public affairs at PIMFA (Personal Investment Management and Financial Advice Association), said: “We remain sceptical that these changes will have any real effect on consumer investment behaviour and fear they will do the opposite.
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“Far from encouraging take up, they risk making the stocks and shares Isa, the very wrapper the Government wants people to use, less attractive.”
HMRC said a technical consultation with industry on the draft legislation will start shortly and regulations will be laid in the autumn, with the new rules coming into force from April 6 2027.
Tom Riley, Nationwide Building Society’s group director of retail products said: “Ensuring a level playing field between cash and non-cash Isas is vital to maintaining a strong savings market.
“We welcome the Government’s introduction of controls to support its ambition to get more people investing, while ensuring over-65s can rely on the full cash Isa allowance.”
Andrew Gall, head of savings at the Building Societies Association (BSA) said: “We welcome the Government providing greater clarity on its proposed Isa reforms.
“It is vital that savers have clear information and sufficient time to understand how the changes will affect them and the choices available to them from April 2027.
“Building societies also need certainty on the final rules so they can update systems and communicate with their members well ahead of implementation.”
Jasvinder Gakhal, chief executive, money at Skipton Building Society said: “This consultation is a step in the right direction,” adding “but the detail now matters”.
Jeremy Cox, head of strategy at Coventry Building Society, said: “We’re moving away from a fair and straightforward Isa system, where all adults can save or invest up to £20,000 tax-free each year, towards a more complex and confusing set of rules that will feel unfair to many consumers.”