News on investment ISA cash: no such thing as a free parking space

30 June 2026

ISA reforms announced on 23 June 2026 mean a 22% charge on interest earned on uninvested cash held in investment ISAs. Here’s what savers and investors need to know.

Rathbones financial planning team

Article last updated 30 June 2026.

Quick take
•    From April 2027, interest on cash held inside investment ISAs will face a flat 22% tax charge.
•    Cash still earns its keep for near-term needs, but if it’s left idle for years, inflation does the quiet damage.
•    Money market funds and very short-dated gilts are possible solutions, though they remain investments rather than bank deposits, and inflation risk remains.

ISA reforms: what’s changing for investment ISA cash?

The government has answered one of the more awkward questions left hanging over its ISA reforms: what happens to uninvested cash sitting inside an investment ISA? From April 2027, interest earned on cash held in non-cash ISAs, such as Stocks and Shares ISAs and Innovative Finance ISAs, which hold certain lending-based investments, will face a flat-rate 22% charge.

The charge will apply regardless of age or income tax position, so non-taxpayers aren’t exempt. It follows the decision to cut the annual tax-free cash ISA allowance for under-65s to £12,000, while leaving the overall ISA allowance at £20,000.

The policy logic is simple enough: From April 2027, the government wants to encourage more long-term saving into investments, rather than cash. It also wants to stop savers recreating the old, higher cash limit by parking cash in an investment ISA instead. The practical effect is less simple: you may find that you still hold cash to pay fees, receive income or waiting for the right moment to invest.

Money market funds and short-dated gilts: cash alternatives in the spotlight

A money market fund may be investors’ solution to this problem. These vehicles are lower-risk investment funds that typically hold short-term debt issued by governments, banks, or companies. They aim to provide a modest return while keeping money relatively accessible. They won’t be subject to the 22% charge, provided they don’t make up 100% of the ISA’s value: in practice, the portfolio must contain at least one other qualifying investment, such as a standard fund, individual share, or bond. This may make them useful if you’re holding money temporarily before investing it.

Very short-dated UK government debt may be another option. UK government bonds with less than a year until maturity tend to be less affected by interest-rate changes than longer-dated bonds. Crucially, they’re investments rather than uninvested cash, so they should fall outside the scope of the charge. Still, there is some risk: prices can still move before maturity, so the return is not the same as interest on a bank deposit. Proceeds from a sale are typically available shortly after the trade settles.

Financial planning: when cash still earns its keep

Cash has not suddenly lost its job description. It remains a sensible home for money needed soon, whether for planned spending, school fees, a house purchase, or an emergency fund. If the date of the liability is known, certainty usually matters more than chasing a little extra return, net of tax.

The bigger risk is letting cash linger after its job is done. The balance may look reassuringly static, but inflation is a patient thief. Over time, it can erode spending power even when the number on the statement has not budged.

A 22% tax charge is no one’s idea of a sweetener. Yet context matters. From April 2027, tax rates on savings income will see higher-rate taxpayers holding the same cash outside an ISA pay 42% income tax on the interest, while additional-rate taxpayers will pay 47% and may also lose some or all of their Personal Savings Allowance. A flat-rate charge inside the ISA may therefore still look relatively benign by comparison.

Investment ISAs: why idle cash may need a second look

For investors, the charge may make idle cash look rather less idle. You might hold cash temporarily while waiting to invest, receiving dividends, rebalancing, or managing risk. If interest on that cash is taxed, the familiar trade-off between convenience and return becomes harder to ignore.

That may prompt a closer look at whether cash held inside investment ISAs is there for a clear, short-term reason, or simply the residue of past decisions. Money market funds and short-dated gilts may have a role, but only if you’re comfortable with their risks, how quickly you can access the money, and what job they’re doing in your ISA. And if a large part of your investment ISA is sitting in cash or cash-like assets for long periods, it may be time to ask whether your portfolio still matches your goals.

The caveat is familiar but important: these are investments, not bank deposits. Their value can move, returns are not guaranteed and they don’t carry the same FSCS protection as cash held with a bank.

The bottom line: cash for now, investments for later

In short, the proposed charge may change the mechanics of holding cash inside investment ISAs, but not the basic discipline: keep cash for near-term needs and emergencies, and invest for longer-term objectives.

If you’re unsure how these changes could affect your ISA cash or wider investment plans, please speak to your usual Rathbones contact or get in touch by filling out our form below. We’re here to help you understand your options, and keep your portfolio aligned with your goals.

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