isa reforms what the new rules mean for investors and their advisers

The UK Government is continuing its push to encourage greater participation in long-term investing, with ISA reform forming part of a broader agenda that includes the Mansion House Accords and initiatives designed to improve engagement with investing like the £50m "Savvy Squirrel" advertising campaign. The stated policy objective is clear: to encourage retail investment and support better long-term returns for savers by directing more capital towards productive assets rather than cash savings.

What are the key changes in ISA regulations for 2027?

​From 6 April 2027, significant changes to ISA rules are expected to come into force focused on Cash ISAs and related anticircumvention rules. While the overall annual ISA allowance structure remains largely intact, the Government is introducing a series of measures designed to limit the use of Stocks & Shares ISAs as substitutes for Cash ISAs.

Lower Cash ISA Limit for Under-65s

The headline change is a reduction in the Cash ISA subscription limit for individuals under age 65. The current £20,000 Cash ISA allowance will fall to £12,000 per tax year.
Importantly, the £20,000 annual allowance for non-cash ISAs, including Stocks & Shares ISAs, will remain unchanged. Likewise, the limits for Lifetime ISAs (LISAs) and Innovative Finance ISAs are unaffected.
The intention is to encourage savers who currently hold substantial cash balances within tax wrappers to consider longer-term investment solutions that have the potential to generate higher returns over time.

Anti-Circumvention Measures

Alongside the lower Cash ISA allowance, the Government is proposing a series of anti-circumvention measures to prevent investors simply having large cash or cash-like holdings in Stocks & Shares ISAs.  Cash-like investments are defined as Money Market Funds.

1. A 22% Charge on Interest Earned on Cash Held in Non-Cash ISAs
Cash can still be held within a non-Cash ISA, but any interest paid on those cash balances will be subject to a 22% charge. The charge will be paid directly by the ISA provider to HMRC, meaning investors will not need to report it on a tax return.
In practice, our expectation is that many platform providers will to stop crediting interest on cash to clients altogether, retaining interest earned for themselves after accounting for the tax payment.
Notably, the proposals do not currently extend this 22% tax charge on interest earned from Money Market Funds (MMFs). Depending on the structure of the fund, MMF distributions may continue to be paid either gross or net of the standard 20% income tax deduction, depending on the structure of the fund.
2. Restrictions on Cash-Like Investments
The Government is also proposing that Stocks & Shares ISA portfolios invested entirely in cash-like assets will become non-qualifying investments.
A cash-like asset is currently defined as a Money Market Fund - a low-risk, highly liquid fund investing primarily in short-dated, investment-grade debt securities with maturities typically of less than one year and is governed by the FCA Money Market Fund Regulations (MMFR).
By contrast, individual equities, collective investment funds, investment trusts, ETFs, corporate bonds and government bonds, including UK gilts, will continue to qualify.
As a result, investors seeking a low-risk income portfolio within a Stocks & Shares ISA may need to include a meaningful allocation to another qualifying investment, such as a short-dated bond fund or equity income fund, rather than relying entirely on MMFs. Alternatively, portfolios of near-term direct gilts could provide a low-volatility qualifying solution.
3. Restrictions on Transfers to Cash ISAs
Under the proposals, transfers from Stocks & Shares ISAs and other non-cash ISAs into Cash ISAs will no longer be permitted.
However, transfers in the opposite direction - from Cash ISAs into Stocks & Shares ISAs - will remain available.
4. Special Treatment for Over-65s
Individuals aged 65 or over will continue to benefit from a £20,000 Cash ISA limit from the tax year that they turn 65.
Additionally, the proposed transfer restrictions will not apply to this group. However, the 22% charge on cash interest within non-Cash ISAs and the prohibition on portfolios invested entirely in cash-like assets will still apply.

What Advisers Need to Consider

The draft rules create several practical considerations for advisers ahead of April 2027.
Money Market Portfolios being held for income-generation with near-nil volatility are likely to require review. Based on the current proposals, advisers may wish to ensure that clients holding 100% MMF portfolios introduce a meaningful allocation - perhaps around 10% - to a qualifying bond or equity income fund prior to 6 April 2027. A token allocation of just 1% may not align with the spirit of the new rules and could attract scrutiny and tightening of anti-circumvention measures.
2% cash allocations within model portfolios are typical for liquidity, fees, and operational purposes, advisers may simply need to accept that these balances effectively become non-interest-bearing. This would be similar to the environment experienced during the ultra-low interest rate period between 2008 and 2021, when cash yields were negligible. Advisers and MPS providers still left a 2% allocation in place.  Moving to a fully invested approach may earn additional yield on that 2% holding, but this should be weighed against the importance for the smooth operation and administration of a model portfolio service.

What Happens Next?

Reviewing cash management arrangements: More broadly, advisers should begin reviewing client cash holdings,ISA and investment solutions well in advance of the implementation date to ensure their clients are not caught out.
The Government has indicated that a technical consultation on the draft legislation will commence shortly. Following consultation, regulations are expected to be laid before Parliament in the autumn, with the new regime taking effect from 6 April 2027.
For investors and advisers alike, the direction of travel is clear: future ISA policy is increasingly focused on encouraging participation in long-term investment markets, while reducing the tax advantages associated with holding large amounts of cash inside tax-exempt investment wrappers.