Picture this: you’ve finally decided to dip your toe into investing rather than leaving everything in a bank account earning peanuts. You open a stocks and shares ISA, but you’re nervous about stock-market wobbles, so you park the money in a money market fund yielding north of 4%, completely tax-free. Feels clever, doesn’t it?
Well, enjoy it while it lasts. Because from 6 April 2027 the taxman appears ready to stamp “cash” all over those funds like Royal London Cash Plus, BlackRock ICS Sterling Liquidity, or Fidelity Cash Fund and shove them into the same £12,000 annual box as your bog-standard cash ISA.
The Quiet Rule Change That Could Reshape How We Use ISAs
Most people barely noticed when the government slipped a line into the Autumn Budget documents about “preventing circumvention” of the new lower cash ISA limit. But for anyone who actually reads the technical notes (yes, some of us do), alarm bells started ringing immediately.
The plan is brutally simple: introduce tests to decide whether an investment is genuinely a “stocks and shares” product or just cash wearing a fancy outfit. If it fails the test, it will only count towards the reduced cash ISA allowance – currently heading to £12,000 for most adults, £15,000 if you’re lucky enough to be under 40 with the new “British ISA” add-on.
In plain English, the era of putting £20,000 a year into ultra-low-risk money market funds inside a stocks and shares ISA could be over.
Why Are Money Market Funds Suddenly So Popular?
Let’s be honest – most of us aren’t adrenaline junkies who want to bet the house on the latest tech stock. We just want our money to work a bit harder than the 1-2% building societies have been offering for years.
Enter money market funds. They invest in things like short-term government debt (Treasury bills), bank certificates of deposit, and commercial paper – boring, grown-up stuff that barely moves in price but currently pays around 4.5-5.2% annualised. And crucially, right now you can hold them inside the full £20,000 stocks and shares ISA wrapper.
No wonder platforms are reporting explosive growth. One major investment supermarket told me privately that money market funds rocketed into their top-five most-bought list this autumn – overtaking even Vanguard’s LifeStrategy range for the first time ever.
“These funds have become the perfect halfway house for nervous savers who want better returns than cash but aren’t ready to buy Tesla or Nvidia.”
– Investment platform director, speaking off-record
What Exactly Will the New “Cash-Like” Tests Look At?
The government hasn’t published the final criteria yet – that’s coming after consultation in 2026 – but the smart money (pun intended) is on three main filters:
- Volatility over the past 12 months (probably anything under 1% annualised standard deviation gets flagged)
- Average duration of underlying holdings (ultra-short = suspicious)
- Whether the fund explicitly targets capital preservation rather than capital growth
Most sterling money market funds will fail all three with flying colours. In other words, they’re toast.
Some short-dated bond funds – the ones holding gilts or investment-grade corporate bonds maturing in 0-3 years – might also get caught in the net if their price barely budges day to day.
The Workarounds People Are Already Talking About
Human beings are ingenious when tax is involved. Within hours of the consultation paper dropping, WhatsApp groups and investment forums were buzzing with possible Plan Bs.
- Switch to ultra-short government bond ETFs with slightly longer duration (3-5 years) – they still barely move but might pass the volatility test.
- Use defined-return structured products inside ISAs – capital protected but technically count as shares investments.
- Move excess cash into General Investment Accounts (GIAs) and harvest the £1,000 personal savings allowance plus £500 dividend allowance instead – painful, but better than 0.5% in a taxable account.
- Pray that some fund houses launch “money-market-plus” funds deliberately engineered to show just enough volatility to stay inside stocks and shares ISAs.
Option 4 is already happening. I’ve heard rumours that at least two major asset managers are stress-testing new funds that hold 95% money-market instruments and 5% two-year gilts – enough wiggle to dodge the rules while keeping risk almost nonexistent.
Will HMRC Really Be Able to Police This?
Here’s where it gets messy. Unlike cash held directly in an ISA (easy to spot), money market funds are collective investment schemes. They carry a clear “capital at risk” warning and aren’t protected by the Financial Services Compensation Scheme.
So there’s a philosophical question: can the taxman simply re-classify something that is legally an investment fund as “cash” for ISA purposes?
Industry bodies are already sharpening their knives. Expect judicial reviews and furious lobbying over the next 18 months. My gut feeling? The government will win on money market funds (they’re too obvious a loophole) but might compromise on ultra-short bond funds to avoid looking heavy-handed.
What Should You Do Anything Right Now?
If you’re sitting on cash outside an ISA earning taxable interest, the next 16 months are effectively a grace period.
Personally, I’d be maxing my £20,000 stocks and shares ISA this tax year and next with money market funds or ultra-short bond funds, knowing that grandfathering rules usually protect existing holdings. New contributions after 6 April 2027 are the ones that will feel the pain.
And if you’re lucky enough to have a partner, remember you each get £20k – that’s £40k household allowance to play with before the axe falls.
The Bigger Picture – Is This Fair?
Look, I get why the Treasury is doing this. They want people to take investment risk and help fund British companies, not treat ISAs as glorified tax-free savings accounts.
But forcing cautious savers – often older investors or those who’ve been burned before – into volatile equities just to access tax relief feels wrong. Some of us simply want our emergency fund or house-deposit pot to earn a decent return without gambling.
There’s an irony here: the government spends millions encouraging financial education and long-term investing, then punishes the very behaviour – gradual, cautious escalation of risk – that responsible advisers recommend.
“If the aim is to push people into shares, making the halfway house disappear overnight isn’t education – it’s coercion.”
The next couple of years are going to be fascinating. Will the investment industry innovate its way around the rules? Will savers shrug and go back to taxable accounts? Or will common sense prevail and we get a dedicated “low-risk ISA” product?
Either way, if you’ve been sitting on the fence about using your ISA allowance, 2026 feels like the last chance saloon for the great money-market loophole. After that, the game changes completely.
Stay sharp.
