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Do the new ISA rules create a two-tier system for investors?

ended 20. August 2026

The Government’s new ISA rules will impose a 22% charge on interest earned on cash held directly within Stocks & Shares ISAs from April 2027.

Scott Gallacher, financial adviser and director at Rowley Turton, questions whether the rules could have unintended consequences for DIY investors — and potentially some advised clients.

Gallacher says:

“The Government wants to encourage people to invest rather than hold cash, but these rules risk penalising investors for perfectly legitimate cash holdings.

“A self-investor might hold a modest amount of cash while waiting to invest, receiving dividends, trading shares or simply covering platform fees. From next April, the interest on that cash will face a 22% charge.

“What makes this particularly interesting is that we understand from discussions with providers that cash held within some managed portfolio services may potentially be treated differently. Similarly, a fund manager can hold cash within a fund without the individual investor apparently facing this direct 22% charge.

“If that understanding is correct, we risk creating a two-tier ISA system where the tax treatment of cash depends not on what the investor is actually doing, but on how their portfolio happens to be structured.

“Having already restricted Cash ISAs to encourage investment, taxing incidental cash held by people who have done exactly that feels like something of a double whammy.”

Questions for ISA providers, investment platforms, tax experts and financial advisers:

  • Do you understand cash held within managed portfolio services or managed funds to escape the new 22% charge, and if so, why?
  • Could two investors with economically similar portfolios face different tax treatment simply because one invests directly and the other uses a managed solution?
  • How will platforms deal with mandatory or recommended cash balances held to meet fees and charges?
  • Will DIY investors be disproportionately affected by the new rules?
  • Could the rules encourage investors to use money market funds or other investments instead of holding ordinary cash?
  • Is there a case for a de minimis exemption for small or genuinely incidental cash balances?
  • Are there other unintended consequences of the new rules that investors should be aware of?

6 responses from the Newspage community

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Scott Gallacher
Director at Rowley Turton
As things stand, this certainly appears to create a two-tier system. DIY investors, and even advised clients holding cash directly on platforms, could face the new 22% charge on interest, while cash held within certain managed solutions may apparently be treated differently.

It does make me wonder who had the Government’s ear when these rules were being drawn up. There are clearly commercial interests that could benefit if direct investors and advised clients are disadvantaged compared with those using providers’ own managed solutions.

If the aim is to stop people using an Investment ISA as a disguised Cash ISA, that is understandable. But genuine working cash held for fees, dividends or pending investment is very different. The rules should recognise that distinction rather than penalise ordinary investors.
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Nouran Moustafa
Practice Principal & IFA at Roxton Wealth
The Government is trying to stop people using Stocks & Shares ISAs as disguised cash accounts. Fair enough. But taxing every pound of interest on incidental cash at 22% risks solving the wrong problem.

Investors hold cash for perfectly sensible reasons: fees, dividends awaiting reinvestment, phased investing or simply because markets are volatile and they do not want to rush a decision.

The danger is that policy starts dictating portfolio behaviour. If two investors have economically similar exposure but one is penalised because cash sits directly in the ISA while another achieves it through a fund or managed structure, that is hard to defend.

I would absolutely support a de minimis exemption. Encourage investing, yes. But do not punish prudence. Sometimes holding a little cash is not avoidance; it is good portfolio management.
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Harvey Dhillon
Founder & CEO at Zmartly
These ISA rules are still a draft, and the charge would land on cash your provider holds on deposit in a stocks and shares ISA. Cash inside a fund escapes the charge, so yes, two similar investors could be taxed differently. HMRC's June factsheet and the draft rules do not address managed portfolio services, so that half rests on what providers have told advisers. DIY investors are clearly in scope, because a platform holds uninvested cash and cash for fees on deposit. The draft taxes the interest on that cash, and does nothing to stop a platform asking for it. It also blocks any refund, so a non-taxpayer would pay the savings basic rate, 22 per cent in the first year, on interest that costs them nothing outside an ISA. That could push savers towards money market funds, and the draft caps that by saying they cannot be everything you hold apart from cash. Small and incidental balances get no exemption, and they deserve one: cash held to pay fees is not an investment choice.
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Rob Mansfield
Independent Financial Advisor at Rootes Wealth Management
It's noble for the government to champion investment over cash. For long-term savings, people should be investing rather than hoarding cash but this is poor legislation that resembles a sledgehammer cracking a walnut. It risks creating complexity and numerous loopholes. That's before you consider the conflict with the Financial Conduct Authority who are putting pressure on platforms to pass on cash interest. For investment ISAs it may make things simpler to just not pay interest.
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Antonia Medlicott
Founder & MD at Investing Insiders
There is a risk that overly prescriptive rules create an uneven playing field but investors shouldn’t assume that all cash held within a managed service will automatically be exempt. The more distinctions there are between different types of ISAs, cash, cash-like investments and managed portfolios, the harder it becomes for ordinary investors to understand what they are being taxed on. Platforms will need to adapt their systems to manage these balances, while investors should pay close attention to communications from their provider, as the administrative detail could be as important as the headline tax change.
The biggest danger is that investors change sensible strategies simply to avoid a tax charge. The rules need to distinguish between someone deliberately holding a large cash balance and someone with a small amount of cash in their portfolio for practical reasons. Otherwise, they risk adding complexity and encouraging people to take investment risks they are not comfortable with.
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Samuel Mather-Holgate
Managing Director & IFA at Mather and Murray Financial
By its nature this policy creates a two-tier ISA system. That is not an accident, it is the point. The Government wants to push savers out of cash and into investments, but there is a real risk the rules punish the wrong behaviour. A DIY investor holding cash briefly for fees, dividends or market timing could be hit, while similar cash exposure inside a fund or managed service may be treated differently. That is messy, unfair and hard to explain. Whether it will actually drive more investment into British businesses is another matter entirely. Much of the equity money leaving UK savers at the moment is still heading to the US, where returns and sentiment have been stronger. Nudging people away from cash does not automatically mean they will buy Britain.