The 22% Tax on Savings Interest — Why It's All a Bit of a Clickbait

Headlines this week have been quick to alarm savers with talk of a "22% tax raid" on interest. You shouldn't be worried, because this charge has nothing to do with your ordinary savings account. Here is what has actually been announced and who it really affects.

The Real Story: Closing a Loophole

The 22% charge is a targeted tax on interest earned from uninvested cash sitting inside a Stocks and Shares ISA — not on savings accounts, and not on actual investments.

The context is this: the government is cutting the annual Cash ISA allowance for under-65s from £20,000 to £12,000 from April 2027. Without this charge, someone could simply park their cash inside a Stocks and Shares ISA instead, dodging the new limit entirely. The 22% charge closes that workaround. There is no threshold or allowance before it kicks in, it applies from the first penny of interest earned on cash in the wrapper, so the message is clear: if you want to hold cash, a Cash ISA is the place to keep it.

It is also worth noting that the charge applies regardless of how much Cash ISA allowance you have used. Even if you have only put £5,000 into a Cash ISA and technically have £7,000 of allowance remaining, cash earning interest inside a Stocks and Shares ISA will still be subject to the 22% charge.

To be clear: shares, funds and other investments held inside a Stocks and Shares ISA are completely unaffected. There is no new tax on investment gains or dividends.

One area still to be clarified is how the charge will apply to small, incidental cash balances - for example, cash held briefly after selling an investment, dividend payments awaiting reinvestment, or money set aside to cover platform fees. HMRC has said further operational details will follow, so watch this space.

Also in the Firing Line: Money Market Funds

The government is also discouraging savers from using money market funds (essentially cash-like investments that track interest rates) as a substitute for a savings account inside a Stocks and Shares ISA. Portfolios invested entirely in these funds will no longer qualify under the new rules. Importantly, the 22% charge does not apply to money market fund returns - they are handled separately by this restriction rather than the interest charge. You can still hold them as part of a broader investment portfolio, but you cannot use them to turn an investment ISA into a glorified savings account.

The New ISA Limits for Under-65s (from 6 April 2027)

• Overall ISA allowance: unchanged at £20,000

• Cash ISA: capped at £12,000 of that allowance

• Stocks and Shares ISA: whatever remains — so anywhere from nothing up to the full £20,000, depending on how much you put in a Cash ISA (but it must be genuinely invested)

• Transfers from a Stocks and Shares ISA back into a Cash ISA will no longer be allowed for under-65s

In practice, if you put nothing in a Cash ISA you can invest the full £20,000 in a Stocks and Shares ISA. If you put £5,000 in a Cash ISA, you can put £15,000 into a Stocks and Shares ISA. The only constraint is that no more than £12,000 can sit in cash.

What About Over-65s?

The good news for those aged 65 and over is that the lower Cash ISA limit and the transfer restriction both fall away - the full £20,000 Cash ISA allowance remains in place, and you can continue to transfer freely between ISA types. However, it is important to note that the 22% charge on cash interest inside a Stocks and Shares ISA applies to everyone, regardless of age. So if you are over 65 and holding cash in an investment ISA, it is still worth reviewing whether that cash would be better placed in a Cash ISA instead.

What Should You Do?

Nothing urgently, the current rules remain in place until 5 April 2027. But it is worth checking whether you have significant cash sitting uninvested inside a Stocks and Shares ISA, and if so, whether it might be better placed elsewhere before the changes kick in.

If you are unsure how any of this affects your personal situation, we are happy to help - just get in touch.

This article is for general information purposes only and does not constitute financial advice. Tax rules are subject to change and their impact depends on your individual circumstances.