UK Government Introduces 22% Tax on Cash Interest in Investment ISAs and Reforms First-Time Buyer Savings

The UK government has announced sweeping reforms to Individual Savings Accounts (ISAs), introducing a 22% tax on interest earned from cash held within stocks and shares ISAs and innovative finance ISAs, effective from April 2027. The measure aims to prevent savers from circumventing reduced cash ISA limits by parking money in investment wrappers. The tax will apply universally to all account holders regardless of age or income tax bracket, including non-taxpayers.

The government has also introduced a simplified first-time buyer ISA to replace the lifetime ISA (LISA), which has been criticised for its flawed design and punitive withdrawal penalties. The new first-time buyer ISA will be available to anyone aged 18 and over, removing the previous age cap of 40 for new savers. It will continue to offer a 25% government bonus on savings, but the bonus will be paid only upon property purchase rather than annually, and withdrawal penalties have been eliminated. The £450,000 property price cap will remain under review through consultation.

Concurrently, cash ISA allowances for under-65s are being reduced to £12,000 annually from April 2027, down from the previous limit, while allowances for those aged 65 and over remain at £20,000. The annual limit for stocks and shares ISAs and innovative finance ISAs continues at £20,000. Additionally, transfer rules have been tightened: from April 2027, under-65s will no longer be able to transfer funds from non-cash ISAs into cash ISAs, though the reverse transfer remains permitted.

Money market funds held in ISAs will not be classified as cash and therefore will not be subject to the 22% charge, provided they do not constitute 100% of the ISA holding. HM Revenue and Customs confirmed these details in June 2026 following the government's November 2025 budget announcement of ISA reforms.

While the Building Societies Association welcomed the rules preventing misuse of stocks and shares ISAs, other industry figures raised concerns that the reforms introduce complexity and could discourage potential investors. Critics noted that the measures entrench the divide between cash and investment accounts and may push risk-averse savers toward cash holdings despite government intentions to encourage stock market investment.