Quick Answer
From 6 April 2027, interest on uninvested cash inside a Stocks and Shares ISA or IFISA is taxed at a flat 22%. Money market funds are exempt. The charge closes the loophole that would allow savers to circumvent the new £12,000 cash ISA allowance ceiling. No action is required before the April 2027 implementation date.
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What Is the 22% Tax on Cash in a Stocks and Shares ISA?
From 6 April 2027, a new flat-rate 22% charge applies to interest earned on uninvested cash sitting inside a Stocks and Shares ISA (S&S ISA) or an Innovative Finance ISA (IFISA). This is a targeted measure introduced alongside the cash ISA allowance reduction, designed to prevent savers from using an S&S ISA as a de facto high-interest cash savings account — thereby circumventing the new £12,000 cash ISA ceiling. The charge is levied at source by the ISA provider; the interest received by the saver is net of the 22% deduction.
Why Has This Rule Been Introduced?
The 22% cash tax closes a structural loophole. Without it, a saver could move cash from a Cash ISA (now limited to £12,000 per year from April 2027) into a Stocks and Shares ISA and simply hold it as uninvested cash — earning the same interest with no tax consequence, and retaining access to the full £20,000 annual ISA allowance. The new rule removes that arbitrage by making cash interest inside an S&S ISA taxable at 22%, while cash held in a Cash ISA remains fully tax-free (within the £12,000 new annual limit).
Which Assets Are Affected and Which Are Exempt?
| Asset Type in S&S ISA | Subject to 22% Cash Tax? | Notes |
|---|---|---|
| Uninvested cash (GBP) | Yes — from 6 April 2027 | Interest taxed at 22% at source |
| Money market funds (MMFs) | No — exempt | MMFs are classified as investments, not cash |
| UK gilts / Treasury bills | No | Treated as fixed-income investments |
| Equities (shares, ETFs) | No | No change to dividend or capital gains treatment within ISA |
| Fixed-term deposits within ISA | Confirm with provider | Rule interpretation pending FCA guidance |
Money market funds are a critical exemption. These are pooled investment funds that hold short-term government securities and corporate paper, generating returns that closely track overnight interest rates. Platforms like Trading 212 and InvestEngine offer money market fund access within an ISA wrapper. Because money market funds are classified as investments rather than cash, their returns are not subject to the 22% charge — making them the primary planning tool for students wanting near-cash returns inside an S&S ISA after April 2027.
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The money market fund exemption is the key planning point for students. If you hold cash in a Stocks and Shares ISA and want to avoid the 22% tax from April 2027, deploy it into an OEIC money market fund (e.g. BlackRock ICS Sterling Liquidity, Royal London Short Term Money Market) within your ISA. Returns track the BoE base rate closely. This is not a risk-free strategy — money market funds can fall in value — but the risk is historically low and the tax advantage is material.
Analyst Note
What This Means for UK Students Using Investment Apps
Many students hold idle cash inside platforms like Trading 212, Freetrade, InvestEngine, or Moneybox after depositing funds but before deciding how to invest. Post-April 2027, this “cash drag” inside an S&S ISA will attract a 22% tax on any interest earned during that period. For students who receive lump-sum payments (maintenance loan instalments, birthday gifts, bursaries) and hold them in an S&S ISA pending deployment, the new rule reduces the after-tax return on that idle cash.
Practical response: If your platform offers a money market fund within the ISA, redirect uninvested cash there immediately upon deposit, rather than leaving it as idle cash. This preserves near-cash liquidity while avoiding the 22% charge. If your platform does not offer a money market fund, consider whether holding large amounts of uninvested cash inside the S&S ISA remains appropriate after April 2027, or whether a separate Cash ISA (within the new £12,000 limit) better suits your short-term liquidity needs.
Risks and Limitations
Money market funds are not risk-free. While money market funds aim to preserve capital and have an extremely low historical default rate, they are not cash and are not covered by FSCS in the same way as bank deposits. In extreme market stress scenarios, money market funds can “break the buck” — fall below their £1 NAV per unit. This is rare but not impossible. Students using money market funds as a cash proxy inside an ISA should understand this distinction.
Implementation uncertainty remains. As of June 2026, detailed HMRC and FCA guidance on exactly which products trigger the 22% charge has not been fully published. The exemption for money market funds has been confirmed, but edge cases — particularly fixed-term cash deposits within ISAs and certain structured products — remain subject to interpretation. Students and advisers should monitor the HMRC ISA guidance page for finalised rules before April 2027.
The 22% rate is a flat charge, not an income tax rate. It applies regardless of your personal income tax band. A basic-rate taxpayer (20%) actually faces a higher effective charge on ISA cash interest than their marginal rate — a deliberate design feature to make holding cash inside an S&S ISA less attractive than holding it in a Cash ISA (where it remains fully tax-free within the new £12,000 limit).
Worked Example: Impact of the 22% Cash Tax on a Student’s ISA
Scenario: A student holds £3,000 in uninvested cash inside their Stocks and Shares ISA from April to September 2027 (5 months). BoE base rate is assumed at 3.75% (as of June 2026). Gross interest earned: £3,000 × 3.75% × (5/12) = £46.88. After 22% cash tax: £46.88 × 0.78 = £36.57 net. Tax cost: £10.31.
Alternative with money market fund: Same £3,000 in a money market fund returning ~3.65% (net of fund charges). Gross return: £3,000 × 3.65% × (5/12) = £45.63. No 22% charge applies. Tax cost: £0 within ISA wrapper. The effective difference is small in absolute terms for a £3,000 balance, but the principle scales with larger balances and longer holding periods.
Frequently Asked Questions
Does the 22% cash tax apply to my current ISA now? No. The charge applies from 6 April 2027 only. Cash held in a Stocks and Shares ISA before that date is fully sheltered — including any interest earned in the 2025/26 and 2026/27 tax years. No action is required before April 2027.
Does the 22% tax apply to dividends or capital gains within my ISA? No. The 22% charge is specific to interest on uninvested cash. Dividends received from shares and funds, and capital gains on the sale of investments, remain fully sheltered within the ISA wrapper with no tax due — the core ISA benefit is unchanged.
What should I do with idle cash in my ISA before April 2027? Nothing needs to change before April 2027. After that date, if your platform offers a money market fund within the ISA, consider deploying idle cash there rather than leaving it uninvested. Check with your specific platform for the money market funds available and their fund charges. For context on platforms that offer this, see our Best Stocks and Shares ISA for Students UK 2026 guide.
Summary
The 22% tax on cash interest inside a Stocks and Shares ISA takes effect from 6 April 2027 and is specifically designed to close the loophole that would otherwise allow savers to circumvent the new £12,000 Cash ISA allowance ceiling. For students with small ISA balances, the immediate financial impact is modest. The key planning tool is the money market fund exemption — deploying uninvested cash into an eligible MMF within your ISA avoids the 22% charge while maintaining near-cash liquidity. Monitor HMRC guidance at gov.uk/individual-savings-accounts as implementation rules are finalised before April 2027.