The government has announced significant changes to ISA allowances from April 2027. Under ISA reform 2027, the annual Cash ISA allowance for people under 65 will reduce from £20,000 to £12,000. The limits for Stocks and Shares ISAs and Innovative Finance ISAs will remain at £20,000.

The reforms aim to encourage more people to invest through non-cash ISAs and achieve stronger long-term returns. Alongside the lower Cash ISA limit, the government plans to introduce new rules to prevent non-cash ISAs from being used primarily as tax-efficient cash savings accounts.

What is changing under ISA reform 2027?

From 6 April 2027, savers under the age of 65 will have a lowerCash ISA allowance of £12,000. The current £20,000 limit will continue for Stocks and Shares ISAs and Innovative Finance ISAs.

Savers aged 65 and over will retain a £20,000 Cash ISA allowance. Eligibility will begin from the start of the tax year in which a person turns 65.

The government says these changes are designed to encourage investment while preventing savers from placing large cash balances into non-cash ISAs and benefiting from tax-free interest over the long term.

New rules for non-cash ISAs

Cash ISAs aren't affected by this change. Interest earned in a Cash ISA stays completely tax-free, just as it does now.

The new rules are aimed at uninvested cash sitting inside non-cash ISAs, like Stocks and Shares ISAs. You can still hold cash inside a Stocks and Shares ISA or Innovative Finance ISA, but any interest earned on that cash will now be taxed at a flat rate of 22%. The aim is to stop people using a Stocks and Shares ISA as a workaround to get a bigger tax-free cash allowance than the new £12,000 Cash ISA limit allows.

There are also new rules around cash-like investments. From April 2027, money market funds will be the only investments classed this way. They can form part of a wider portfolio, but they can't make up your entire non-cash ISA.

Transfers between ISA types are changing too. You won't be able to move money from a non-cash ISA into a Cash ISA anymore. You can still transfer the other way, moving money from a Cash ISA into a non-cash ISA.

Everyday investments held in Stocks and Shares ISAs won't be treated as cash-like assets under the new rules. This includes shares, investment funds, exchange-traded funds and government bonds.

Key points for savers

• The Cash ISA allowance for savers under 65 will reduce to £12,000 from April 2027
• Stocks and Shares ISA and Innovative Finance ISA limits will remain at £20,000
• Cash can still be held within non-cash ISAs, but interest earned on those balances will face a 22% charge
• Diversified portfolios with some cash-like investments will still qualify
• The new rules are expected to take effect from 6 April 2027 following consultation and legislation

How ISAs currently work

ISAs continue to offer tax-efficient ways to save and invest. Interest earned on cash held in an ISA and any income or capital gains generated from investments remain free from tax and do not need to be declared on a tax return.

There are four main types of ISA:

• Cash ISA
• Stocks and Shares ISA
• Innovative Finance ISA
• Lifetime ISA

Savers can currently invest up to £20,000 across their ISA accounts each tax year, which runs from 6 April to 5 April. Lifetime ISAs have a separate annual contribution limit of £4,000.

ISA reform 2027 represents one of the biggest changes to ISA rules in recent years. Anyone who currently relies on Cash ISAs as a primary savings vehicle may wish to review their plans ahead of the new rules coming into force.

What should savers do next?

ISA reform 2027 does not take effect until April 2027, but the changes could affect how some people structure their savings and investments.

Anyone who currently relies on Cash ISAs may want to review how the lower allowance could affect their long-term plans. It may also be a good time to consider how different types of ISAs fit into your wider financial and tax planning.

The draft legislation is still subject to consultation, so further detail is expected before the rules come into force.

If you would like advice on tax-efficient saving, investment structures or planning ahead for the new ISA rules, contact David Howard Chartered Accountants. Our team can help you understand the changes and review your options with clear, practical advice tailored to your circumstances.