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The government announced a 22% tax on interest earned from cash in stocks and shares Isas, in a bid to prevent loopholes for tax-free cash savings.
The new rules will come into effect in April 2027, when the cash Isa limit is reduced from £20,000 to £12,000 for under 65s.
Alongside these changes, the government has also launched a consultation on a new first-time buyer (FTB) Isa, which would offer a government bonus towards buying a first home
Here, Which? explains what the new rules mean for your Isa savings and how the proposed first-time buyer Isa could work.
Please note: this article is for information purposes only and does not constitute financial or investment advice. Please refer to the particular T&Cs of an investment platform before committing to any financial products.
You’ll still have an overall £20,000 allowance for Isas each year, but only £12,000 of that can go into a cash Isa. The rest would be able to be put into an investment Isa.
To avoid savers using stocks and shares Isas as they would cash Isas, the new anti-circumvention rules say any interest you earn on cash in a stocks and shares Isa will be taxed at 22%.
The impact will vary depending on how much cash you hold and the interest rate paid by your provider.
This aligns with the tax rate on savings income for basic-rate taxpayers, but also applies to higher-rate taxpayers and those who don’t pay tax at all.
While the cash Isa limit reduction only applies to over 65s, the 22% tax on interest will apply to people of all ages. The rules also apply to innovative finance Isas.
Under 65s will also be prevented from transferring a stocks and shares Isa into a cash Isa. At the point you turn 65, this rule will no longer apply.
Cash is any uninvested money in your stocks and shares Isa, while money market funds will be defined as ‘cash-like assets’ from April 2027. These funds buy short-term debts from governments or companies that have high credit ratings and give returns similar to higher-paying savings accounts.
Some investors use money market funds in a similar way to cash, as they’re low-risk and easily accessible.
You’d only be subject to the new tax on money market funds if they make up 100% of your Isa, either on their own or combined with cash.
As long as you had at least one investment fund, share or bond in your Isa, having a substantial holding of money market funds would not incur a penalty.
The government has opened a consultation on a new first-time buyer Isa, with the consultation containing some indications of how the product could work.
It confirmed that its sole purpose would be to help first-time buyers get on the property ladder, unlike the current lifetime Isa (Lisa), which can also be used for saving for later life. It would be available as either a cash Isa or stocks and shares Isa.
Another difference from the Lisa is that there would be no upper age limit for opening a FTB Isa, as the government recognises that the age at which people buy their first home is rising.
Any money you pay into the account would count towards your overall £20,000 annual Isa allowance. If you choose a cash FTB Isa, it would also count towards the new £12,000 cash Isa limit due to be introduced from April 2027. Any interest earned or investment growth would be tax-free.
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A key difference from the Lisa is that there would be no withdrawal charge if you take money out of a FTB Isa.
With a Lisa, you usually face a 25% withdrawal charge if you take money out for anything other than buying your first home or later life. This claws back the government bonus and means you can lose some of your own savings too.
The FTB Isa would work differently because the government bonus would be paid when you buy a property, rather than being added to your account as you save.
Under the proposals, the bonus would be paid at exchange. Buyers would then have 90 days from claiming the bonus to complete their purchase.
You would only qualify for the government bonus if you're buying your first home with a mortgage. It would not be available for cash purchases or unregulated financing arrangements. You would also need to have held the account for at least a year before you could claim the bonus.
If you already have a Lisa, you would not be able to transfer money from it into the new FTB Isa. However, to ensure existing Lisa holders don't lose out, you would able to use money held in both a Lisa and a FTB Isa towards the same property purcha
You would also be able to hold both a FTB Isa and a Lisa, although you could only pay into one of the accounts in the same tax year.
The government has yet to reveal how generous the bonus will be or the property price cap that will apply to the scheme.
Lisa savers currently receive a 25% government bonus on contributions of up to £4,000 a year, meaning they can receive up to £1,000 annually
It has confirmed that the bonus will be based on the amount you pay into the account, minus any withdrawals.
Annual contribution limits, property price caps and the government bonus rate will be announced at a future fiscal event, according to the consultation.
The consultation is open until 17 August 2026.
