ISA savers urged to ‘review accounts’ as balances soar by £38billion (Image: GETTY)
ISA savers have been urged to review their accounts ahead of next year’s rule changes. It comes as adult cash ISA balances rocketed by £38 billion between January and May, as savers rushed to deposit cash before the planned reduction in the cash ISA allowance from £20,000 to £12,000 for under-65s from April 2027.
Over the period, the average adult cash ISA balance increased from £17,264 to £17,848, while the average balance held in non-ISA accounts fell marginally from £11,513 to £11,416. Much of the growth was driven by strong demand for fixed-term products.
Major ISA rule changes are set to come into effect next April. (Image: Getty)
Fixed-term ISA balances accounted for £28.8 billion of the overall increase, rising to £269.9 billion as customers locked in rates amid expectations of lower interest rates and changes to the tax-free savings landscape.
Instant access ISA balances also grew, although at a steadier pace, increasing by £9.6 billion to £203.5 billion
Andrew Wright, head of savings at Paragon Bank, said: “The £38 billion increase in adult cash ISA balances shows that savers continue to recognise the value of protecting their interest from tax.
“It appears many used the busy ISA season to make more effective use of the tax-free wrapper. The particularly strong growth in fixed-term ISAs also suggests that customers were keen to secure competitive rates amid expectations that interest rates could fall.”
Mr Wright added: “With changes to the cash ISA allowance planned from April 2027, savers should review their existing accounts, understand how much of their allowance they are using and ensure their money continues to work as hard as possible for them.”
How will ISAs change in 2027?
During the Autumn Budget in 2025, it was announced that from April 2027, the Cash ISA allowance would be reduced to £12,000 while the limit for Stocks and Shares and Innovative Finance ISAs (non-Cash ISAs) would remain at £20,000.
However, the Cash ISA allowance for those aged 65 and over would remain at £20,000.
To support this change, Labour said a number of rules will be introduced to “ensure the policy achieves its objective” of encouraging retail investment and supporting better returns for savers.
The new rules are designed to minimise opportunities to circumvent the lower Cash ISA limit, while preserving the flexibility needed for legitimate investment activity within non-Cash ISAs.
A 22% charge applied to interest paid on cash held in non-cash ISAs
Investors will still be able to hold cash in a stocks and shares ISA, but a flat-rate charge (22%) will apply to any interest or alternative finance return paid to discourage long-term cash holdings.
ISA managers will pay the charge to HMRC – you will not be required to declare it.
While basic-rate taxpayers can usually earn up to £1,000 in interest tax-free each year via their Personal Savings Allowance, you will not be able to use that allowance here. The 22% charge will apply automatically to everyone, regardless of your personal income tax bracket.
Non-Cash ISA portfolios made up of 100% cash-like assets will be ‘non-qualifying’ investments
From April 2027, you will no longer be allowed to use a Stocks & Shares ISA purely to hold your money in Money Market Funds (MMFs) as a substitute for cash.
If you want to hold Money Market Funds inside an investment ISA, they must form part of a mixed portfolio alongside real investments like stocks or bonds, not 100% of it.
From April 2027, cash-like assets will be defined as Money Market Funds only.
Other common investments held in Stocks and Shares ISAs, such as individual shares, funds, investment trusts, exchange-traded funds and corporate and Government bonds, including UK gilts, would not be treated as cash-like assets under this measure.
Transfers from non-cash ISAs to Cash ISAs
Additionally, Transfers from non-Cash ISAs into Cash ISAs will not be allowed. However, it will remain possible to transfer from a Cash ISA to a non-Cash ISA.
How the rules will be applied to those 65 and over
People aged 65 and over will benefit from a higher Cash ISA limit of £20,000, with entitlement applying from the start of the tax year in which they turn 65. The transfer restriction will no longer apply from this point.
However, the charge on interest earned on cash held in non-Cash ISAs and the prohibition on 100% cash-like investments will remain in place.
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Some industry experts have slammed the changes as a “dog’s dinner”.
Rob Mansfield, independent financial advisor (IFA) at Tonbridge-based Rootes Wealth Management, said: “Given all the problems the country faces, is this really the best use of the Government’s time? The whole beauty of the ISA was that it’s a simple concept. Tax-free savings up to a limit.
“Governments keep faffing around with it and are undermining savings. People tend to default to cash because they don’t know any different, and investments seem scary. These attempts to cajole people into investments is never likely to work well.”
David Stirling, independent financial adviser at Belfast-based Mint Wealth, said the new rules will cause “chaos”
He added: “The new ISA rules are a masterclass in government policy that sounds coherent in a press release and disintegrates on contact with reality. Under-65s get a £12,000 cash ISA allowance, over-65s get £20,000, and the cut-off is not the State Pension age of 67 but the apparently magic number of 65, selected for reasons the government has yet to share with anyone.
“You are simultaneously too young for your State Pension but old enough for preferential ISA treatment. Savers will need their birth certificate and a flowchart just to work out what they are allowed to do. The 22% charge on cash interest inside stocks and shares ISAs completes the chaos.
“Older savers can sidestep it by transferring into a cash ISA. Younger ones cannot. Anyone locked into a fixed-term deposit inside an investment ISA maturing after April 2027 gets penalised for something they did entirely legally under rules since rewritten around them.”
Former Chancellor Rachel Reeves announced the new measures last November, as part of the Government’s wider strategy to “develop a retail investment culture” to boost the economy and drive better returns for savers.