Tax on interest after a client moves to cash

A large number of UK investors have moved money out of equity funds and into cash and bonds over the past fifteen months. Cash is taxed every year in a way an unsold equity holding is not. The first professional to see that in writing is the one who prepares the client's tax return, about a year after the move.

7 min read · Altro Partners, by Equity & General

£15.16bn

withdrawn from UK equity funds since June 2025, with outflows in fourteen of the last fifteen months

Calastone Fund Flow Index, August 2026

What Calastone recorded

Calastone's Fund Flow Index for August 2026 records net outflows of £315m from UK equity funds in the month, the fourteenth month of outflows in the last fifteen, taking total withdrawals since June 2025 to £15.16bn. July saw £1.61bn withdrawn.

Bond funds took in £407m in August, a fourth consecutive month of inflows. Money market funds took in £364m, their strongest month since November and more than double the twelve-month average. Bond and money market funds have absorbed £8.7bn between them since the equity outflows began in June 2025.

Edward Glyn, head of global markets at Calastone, said:

“Such prolonged outflows from equity funds are incredibly rare… Investors aren’t panicking, but they are stubbornly refusing to chase equity markets higher.”

He added that “cash is doing more of the talking” and that Budget speculation was adding to the caution, with some investors concerned about possible changes to capital gains and pension tax reliefs.

Why the tax shows up with the accountant

A client who holds an accumulating equity fund and does not sell it pays no capital gains tax in the year, however much the holding grows. The gain is taxed when it is realised, and the first £3,000 of gains in the year falls within the annual exempt amount (gov.uk, Capital Gains Tax rates). Dividend income is taxed as it arises.

Move the same money into a deposit account or a money market fund and interest is taxable in the year it arises, at the client's marginal rate. The Personal Savings Allowance shelters £1,000 for a basic-rate taxpayer, £500 at higher rate and nil at additional rate (gov.uk, Tax on savings interest). There is no annual exemption and no deferral.

The figures for one client

Illustration, using a made-up client. A client earns a salary of £95,000 and, during 2025, moved £250,000 out of equity funds into deposits and a money market fund. The example assumes a return of 3.75%.

Interest for the year: £250,000 at 3.75% is £9,375.
The client is a higher-rate taxpayer, so the Personal Savings Allowance is £500. Taxable interest is £8,875, and at 40% the tax is £3,550.
Adjusted net income is now £104,375. Above £100,000 the personal allowance falls by £1 for every £2 of excess (gov.uk, Income Tax rates and Personal Allowances). £4,375 over the threshold reduces the allowance by £2,187.
That lost allowance is taxed at 40%, adding £875.

Total tax attributable to the interest: £4,425 on £9,375 of income, an effective rate of 47.2%.

How to find it in your files

The evidence is a comparison the practice can run without asking the client anything. The marker is a year-on-year rise in untaxed interest received, in particular where employment or trading income has not moved. On the return it is one figure that has doubled or more. In the paperwork it is new deposit accounts, or a fund holding that has changed from equity to money market.

Two related patterns sit alongside it. A client outside self assessment who receives a Simple Assessment letter for the first time has savings interest that has crossed a threshold. A client whose company is holding cash on the balance sheet raises a different set of questions, covered in the cash question. Both belong with the other facts a practice can already see, covered in what a client file already shows.

Why the client moved

Glyn's point about Budget speculation changes the nature of the conversation. A client who moved to cash because they had reached a view on market valuations has made their decision. A client who moved to cash because of rumoured changes to capital gains tax or pension reliefs has taken a certain, annual tax cost to avoid a possible future one.

That may still be the right call, and it is not for an accountant to say. The client may not realise they are in that position, and the financial planner can model it. The Chancellor declined to rule out tax rises ahead of the Budget in comments reported by Money Marketing on 7 September 2026. The pre-Budget question covers how to handle client questions in that window.

What the accountant holds and what the financial planner holds

The accountant holds facts: the size of the interest, the marginal rate it suffers, the allowance it has eroded, whether the £20,000 ISA allowance for 2026 to 2027 (gov.uk, Individual Savings Accounts) has been used, and what the same money was doing the year before. All of that can be stated to the client without a recommendation.

The financial planner holds the modelling: whether that much cash suits this client over their time horizon, how it interacts with their retirement plans, and what the alternatives would cost. Those are regulated questions. Who does what sets out the split, and how an introduction runs sets out what happens when the client asks for one.

The FCA's Financial Lives 2024 survey found that 8.6% of UK adults had taken regulated financial advice in the previous twelve months, and 13% of the self-employed. The advice gap sets out who that leaves.

What is still uncertain

The tax treatment above is settled: the Personal Savings Allowance figures, the personal allowance taper and the rate bands are current law for 2026 to 2027. The Budget has not yet been delivered. Capital gains tax and pension tax relief have both been the subject of speculation, the Chancellor has not ruled out tax rises, and which of the rumoured changes will happen is not known until the Budget is delivered. Any conversation now should deal with the rules as they stand.

The fund flows may also change. August's £315m was a fifth of July's figure, and Calastone's commentary describes investors as waiting. Whether the money returns to equities, stays in cash or moves again after the Budget is not knowable now. The work that can be done now is identifying who has moved.

Common questions

Is a money market fund distribution taxed as interest or as a dividend?

It depends on what the fund holds. A UK authorised fund holding mainly interest-bearing assets makes interest distributions, taxed as savings income against the Personal Savings Allowance of £1,000 for a basic-rate taxpayer, £500 at higher rate and nil at additional rate. An equity fund makes dividend distributions, taxed under the dividend rules. The consolidated tax voucher states which kind of distribution has been paid. Read it before deciding which box the figure goes in.

Does a client have to file a return because they now have savings interest?

Not always. Banks and building societies report interest to HMRC directly, and for someone outside self assessment HMRC collects the tax by adjusting a PAYE code or by issuing a Simple Assessment letter. For a client already inside self assessment, the interest appears in the return.

Is an ISA the answer?

The ISA allowance is £20,000 for 2026 to 2027, and interest or growth inside an ISA is not taxed. Noting that a client has not used the allowance is an observation. It is not a complete answer: £250,000 does not fit inside a £20,000 allowance, the choice between a cash ISA and a stocks and shares ISA is an investment decision, and the order in which the ISA, pension contributions and the client's wider position are dealt with is regulated advice. Pointing out the unused allowance is the accountant's part. Deciding what goes in it is the financial planner's.

Does the same issue arise with money held inside the company?

It arises differently. Interest earned on company deposits is taxable profit and increases the corporation tax charge, but there is no Personal Savings Allowance and no personal allowance taper. The separate questions with company cash are business property relief, trading status and the small profits rate, which are covered in the cash question.

Where does the accountant's work stop and the financial planner's begin?

The accountant holds the evidence and can describe it. Saying that a client's savings interest has risen, that it is taxed at their marginal rate, that it has eroded part of their personal allowance and that the ISA allowance is unused are statements of fact about the return. Whether the client should hold that much in cash, over what period, and what else the money might do is regulated advice and sits with the Equity & General financial planner.