The new ISA rules will reshape how clients use cash and investments within their tax-efficient allowances. Tom Archer, tax and trust specialist at Quilter, explains the changes and highlights why there’s a need to review cash holdings and money market fund allocations ahead of 2027.
The government’s stated aim is to create a ‘nation of investors’ by encouraging greater use of investments rather than cash savings, where that is suitable.
The practical result is a set of ISA changes that limit cash ISA funding for under 65s and make it less attractive to use a stocks and shares ISA as a cash parking place.
Advisers and paraplanners should now review ISA clients’ cash holdings and check whether any cash-like investments remain suitable under the new rules.
What is changing?
A £12,000 cash ISA limit will apply for under 65s. From 6 April 2027, under 65s will only be able to pay up to £12,000 into a cash ISA each tax year.
The overall ISA allowance remains £20,000, so a client who wants to use the full allowance would need to place at least £8,000 into a stocks and shares ISA or innovative finance ISA.
Under 65s will not be able to transfer from a stocks and shares ISA into a cash ISA. This also applies from 6 April 2027. It prevents clients using a stocks and shares ISA contribution as a temporary route back into cash ISA holdings.
Transfers from a cash ISA to other ISA types will still be allowed.
The restrictions lift from age 65. Once a client reaches the tax year in which they turn 65, they can again contribute up to the full £20,000 allowance to a cash ISA and transfer into one from a stocks and shares ISA or innovative finance ISA.
The change applies from the start of that tax year, not from the client’s birthday.
Interest on cash inside a stocks and shares ISA will be subject to a tax charge. From 6 April 2027, interest earned on cash in a stocks and shares ISA will be charged at a flat rate equivalent to the savings income rate, which will be 22%.
This will not be reduced by income tax allowances, and higher or additional rate taxpayers will not pay more through self-assessment.
A 100% allocation to money market funds will be treated as a non-qualifying investment. ISA rules already restrict the assets that can be held.
From the 2027 tax year, a stocks and shares ISA made up entirely of money market funds will be treated holding non-qualifying investments. That means the tax advantages of an ISA can be lost, with income and capital gains tax applying.
The ISA provider must then sell or remove the assets from the ISA. Money market funds may still be used in the ISA and benefit from tax efficient income and growth – if the total allocation remains below 100%.
ISA managers are required to provide HMRC annual statistical data showing the use of money market funds, enabling HMRC to keep an eye on this rule.
Where the confusion sits
The age 65 relaxation only helps with cash ISA subscriptions and transfers into cash ISAs. It does not switch off the separate rules preventing 100% allocation to money market funds or the tax charge which applies to interest on cash.
A client over 65 who wants to hold 100% in money market funds or has a high cash holding still needs to consider moving that money to a cash ISA.
What this means for client reviews
The planning point is not limited to the new £12,000 cash ISA limit. From 2027, advisers and paraplanners will also need to look more closely at how cash and money market funds are being used inside stocks and shares ISAs.
Client reviews should check whether cash is being held for a clear planning reason, such as short-term liquidity or phased investment, or whether the ISA has drifted into being used as a cash substitute.
Where money market funds are used, the recommendation should also confirm that the holding does not create a non-qualifying investment position.
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