A money market fund is an investment fund, not a bank account. It holds short-term debt and deposits and aims to match money market rates or preserve value, but its value can fall and the investor bears that risk (Money Market Funds Regulation, Article 36).
From 6 April 2027, regulations made on 10 September 2026 let a stocks and shares ISA hold money market funds only as part of a portfolio: “100% of the value of the investments, other than cash, held under the stocks and shares component, must not be money market funds” (ISA (Amendment) (No. 2) Regulations 2026). For now they are the only assets on the “cash-like” list, and some practical details are still to be settled.
What a money market fund is
UK law defines these funds by what they do. They invest in short-term assets and aim to offer returns in line with money market rates or to preserve the value of the investment (Article 1). Each must be set up as one of three types: a variable net asset value fund, a public debt constant net asset value fund, or a low-volatility net asset value fund (Article 3).
The rules cap how far ahead a fund can lend. A short-term money market fund must keep the weighted average maturity of its portfolio at no more than 60 days and its weighted average life at no more than 120 days (Article 24). A standard money market fund can go to six months and 12 months (Article 25). Both must hold minimum shares of assets that mature daily and weekly, so that they can pay out withdrawals.
They cannot lean on a sponsor either. A money market fund may not receive external support, such as a cash injection or a guarantee from a third party, intended to keep its value or liquidity steady (Article 35).
How a money market fund differs from cash
The law spells out the difference. Any marketing document must say that the fund is not a guaranteed investment, that investing in it is different from a deposit because the principal can fluctuate, that it does not rely on external support, and that the risk of losing the principal is borne by the investor (Article 36). Managers must publish, at least weekly, the fund’s maturity breakdown, credit profile, 10 largest holdings, total assets and net yield, so investors can see what they own.
| Bank or building society deposit | Money market fund | |
|---|---|---|
| What you own | A claim on the bank | Units in a fund that owns short-term debt and deposits |
| Value | Fixed in pounds | Can rise or fall |
| Return | Interest set by the bank | The fund’s yield after charges, which moves with short-term rates |
| Protection | FSCS up to £120,000 per person, per institution (FSCS) | FSCS up to £85,000 if an authorised firm fails with a shortfall; nothing for poor performance (FSCS) |
| Tax outside an ISA | Interest taxed as savings income above the allowance | Interest distributions, taxed as interest, where over 60% of the fund is in qualifying investments (AIF Tax Regulations); gains on units may be liable to capital gains tax |
| In a stocks and shares ISA from 6 April 2027 | Interest charged at 22% | Allowed, but not as 100% of the investments other than cash |
Why they matter now
Money market funds were the best-selling asset class with UK fund investors in 2025, taking £6.9bn, the highest annual inflow on record for the sector, and Short Term Money Market was the best-selling sector at £6.1bn (Investment Association, 5 February 2026). The Investment Association said investors and professional advisers “favoured cash-like investments for their flexibility and liquidity”. Inside ISAs they offer a way to hold something close to cash in a stocks and shares account, which is exactly why the 2027 rules take an interest in them.
What the April 2027 ISA rules say
HMRC’s June 2026 newsletter sets out the policy (HMRC). Cash-like assets held as partial allocations will be permitted. A list of cash-like investments will be provided in legislation, initially limited to money market funds. Wholly cash-like portfolios will be ineligible. When one is identified, ISA managers will be expected to help the investor either sell the asset and reinvest within the ISA or remove it from the wrapper, and managers will report the market value of money market fund holdings in their existing end of year statistical return. Unlike the lower cash limit, the cash-like rule also applies to savers aged 65 and over, though not to Junior ISAs (HMRC newsletter 23).
The regulations, made on 10 September 2026 and laid before Parliament on 14 September, turn that policy into three changes (SI 2026/1018):
- A definition. A money market fund means one authorised under Article 4 or 5 of the Money Market Funds Regulation.
- A condition for stocks and shares ISAs. Money market funds become a listed qualifying investment, subject to the rule that “100% of the value of the investments, other than cash, held under the stocks and shares component, must not be money market funds”.
- Cash ISAs. Money market funds stay on the list of investments a cash ISA can hold, under the new definition. The current regulations already list money market funds that meet FCA rules (ISA Regulations 1998, regulation 8).
Separately, interest on cash held inside a stocks and shares ISA faces a 22% charge. A proposed rule limiting that cash to money held for investing or paying fees was dropped after consultation (HMRC newsletter 23). Our explainer on the 22% charge covers that half of the package.
How the test might work, on the wording of the regulations
The three portfolios below are hypothetical and apply only the text of the regulations. HMRC guidance, due before April 2027, could change how the test is applied in practice.
| Stocks and shares ISA holding | Money market funds as a share of non-cash investments | Result on the wording |
|---|---|---|
| £20,000 in a money market fund | 100% | Fails: wholly cash-like |
| £18,000 in a money market fund, £2,000 in an equity fund | 90% | Appears to pass |
| £15,000 in a money market fund, £5,000 in cash | 100%, because cash is left out of the calculation | Fails, and the cash interest also faces the 22% charge |
What is still to be confirmed
- The text is settled. The technical consultation closed on 2 August 2026 (HMRC) and the regulations were made on 10 September 2026. After consultation the government confirmed that the money market fund restriction will not apply to Junior ISAs, and said it will keep the definition of money market funds under review (HMRC newsletter 23).
- The list. HMRC says the list is “initially” limited to money market funds. It has not said whether other short-dated assets could be added later.
- How the test is applied. The regulations apply the 100% condition to the investments held under an ISA’s stocks and shares component, but do not say at what point it is checked.
- What managers will do. HMRC names two outcomes, reinvesting or removing the asset, but not a timetable.
- Guidance and the Budget. HMRC says it will publish updated ISA manager guidance before 6 April 2027, and the Budget is on 28 October 2026 (OBR).
For the wider picture, including what else the cash could become, read our cover story on the cash ISA changes. For how money market funds sit alongside bond funds and gilts, see bonds explained, and for how fund structures differ, funds versus ETFs.
