New rules will be introduced to prevent savers from bypassing the upcoming lower limit on cash ISAs.
Guidance published on the HM Revenue and Customs (HMRC) website said rules will be introduced “to avoid circumvention of the lower limit for cash ISAs”.
These rules are expected to include charges on interest earned on cash held within stocks and shares ISAs, as well as checks to determine whether money is being kept in “cash-like” accounts.
At present, adults can save up to £20,000 each year across cash ISAs, stocks and shares ISAs, or a combination of both.
However, the government announced in the budget that, from April 2027, the annual cash ISA allowance for adults will drop to £12,000.
Only savers aged 65 and over will keep the full £20,000 cash ISA limit.
The overall adult ISA contribution limit will remain at £20,000, which may encourage some savers who reach the £12,000 cash ISA cap to invest more in stocks and shares ISAs.
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HMRC said the new rules will prevent transfers from stocks and shares ISAs or Innovative Finance ISAs into cash ISAs.
They will also include tests to check whether an investment qualifies as a stocks and shares ISA or is considered “cash-like”.
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In addition, charges could be applied to any interest earned on cash held in stocks and shares or Innovative Finance ISAs.
HMRC said industry will be consulted on the draft legislation, which will amend ISA regulations and be presented to parliament well before April 2027.
‘New, simpler’ ISA product
The budget also revealed plans for a consultation in early 2026 on a “new, simpler” ISA for first-time homebuyers, which would replace the Lifetime ISA.
The new product is expected to be more flexible, removing withdrawal penalties and allowing savers to access the bonus when buying a house even if circumstances change.
Jason Hollands, managing director of online investment platform Bestinvest, warned there were still “unanswered questions” about how the reduced £12,000 cash ISA limit will work.
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Mr Hollands raised concerns that HMRC’s proposed charges on cash held in stocks and shares ISAs were a potential “stealth tax” on investors, and said tests to determine “cash-like” investments could create uncertainty over alternatives such as money market funds and short-dated bonds.
He added that if ISA managers faced fees on client cash balances, these costs would likely be passed on to account holders.
