Savers are being warned that simple ISA mistakes could cost them time and money – and might even mean missing out on a lucrative 25% government bonus.
With the end of the tax year looming on April 5, experts say too many people are failing to make full use of the £20,000 annual ISA allowance.
At the same time, others are paying unnecessary fees or choosing the wrong type of account altogether. Dan Coatsworth, head of markets at AJ Bell, said that even seasoned investors can slip up.
“ISAs are a saver’s or investor’s best friend, acting as a place to build up wealth and shelter all the gains from the taxman,” he said.
“But even the savviest investor can succumb to mistakes during their ISA journey, costing them both time and money.”
1. Picking the wrong type of ISA
Many people assume an ISA is a one-size-fits-all product. It is not.
“There are six types of ISA, which means it’s easy to pick the wrong one for your savings or investments,” said Mr Coatsworth.
“It might be that you’ve opted for a Cash ISA, but you’re saving for the long term, and an investment ISA would be a better option. You can only hold cash in a Cash ISA, whereas investment ISAs can hold a range of shares, funds, and bonds.”
“You may have picked a Stocks and Shares ISA to save for the deposit for a first home, but you could have benefitted from the 25% government bonus available on the Lifetime ISA. Everyone loves free money, but only Lifetime ISA holders get the extra cherry on the cake.”
Under current rules, savers can put up to £4,000 a year into a Lifetime ISA and receive a 25% government bonus on contributions. Parents may also be wasting their own allowance unnecessarily.
“Equally, if you’re saving for your child, paying into a Junior ISA might be better than saving the money into your own ISA. That’s because your child gets their own allowance in a Junior ISA, so there is no reason to share your ISA allowance with them.”
2. Paying unnecessary costs
Charges can quietly eat away at returns. Mr Coatsworth said: “It’s normal to pay some fees and charges with investing, but one ISA mistake to avoid is paying out too much, as ultimately this will eat into your returns.
“Make sure you’re not buying and selling investments too often. Many platforms will charge a fee every time to buy and sell – and these can add up over time. One option is to use regular investment services where dealing charges are often lower.”
He adds that consolidation can cut costs.
“If you have ISAs scattered all over the place you may find you can reduce fees by consolidating them in one place. For example, if you hold Nvidia shares in two separate ISAs and decide to sell out, you will pay two lots of dealing fees. Holding your ISAs in one place will also make them easier to manage as a portfolio.”
3. Not using your allowance
Every adult can invest up to £20,000 into ISAs each tax year. The Lifetime ISA is capped at £4,000 within that total. He said: “Make sure you’re making the most of this allowance as much as possible, as if you don’t use it, you lose it – you can’t carry forward any unused allowances to future years.
“An ISA protects your investments from capital gains, dividend, and income tax, so it’s the best place for your investments. All the wealth you create in the ISA is yours to keep and the taxman gets nothing. Investors with spare money to save and any unused ISA allowance for the current tax year should consider using it before the 5 April deadline.”
4. Thinking you can only have one ISA
ISA rules have changed, but not everyone has caught up. Mr Coatsworth said: “Historically, you could only pay new money into one ISA of each type in a tax year. There are now no limits on the total number of ISAs you can open in a tax year.”
He added: “The only exceptions are Lifetime ISAs and Junior ISAs, where you can only pay into one account of each type, every tax year. If you want to make use of this flexibility, just make sure you are keeping track of what you’ve paid in and where, to make sure you don’t go over your ISA allowance.”
5. Paying in more than £20,000
While failing to use the allowance is one problem, breaching it is another.
“While everyone has a £20,000 ISA allowance, you need to make sure you don’t pay in more than that amount each tax year,” said Mr Coatsworth.
“This allowance is split between all types of ISA and all your accounts, which may be with different providers. Because you can have accounts with different providers, there’s no way for them to know everything you’re paying in, which means it’s down to you to keep track of your total contributions.”
If you do slip up, don’t try to correct it yourself.
“If you do accidentally pay too much into an ISA, you shouldn’t attempt to fix it by taking money out of one account. Instead, call HMRC’s ISA helpline on 0300 200 3300 to explain the situation. They’ll work out which ISA payment breached the limit and reclaim the money for you.”
6. Losing track of old ISAs
Finally, many savers simply forget about older accounts.
“Unless you are a stickler for filing paperwork or take pride in maintaining spreadsheets, it’s easy to lose track of accounts, log-in details or savings pots over time,” he said.
“Forgetting about accounts also implies you aren’t monitoring what’s inside them. Some might be gathering dust, earning low interest, or the investments might no longer be right for you.”
He urges savers to take action. “Dig out old paperwork, reset passwords and dive back into the accounts to see how much you have saved. Once you’ve done that you should consider transferring the money into one ISA, to make it easier to monitor and to reduce your admin, and potentially cut your fees, too.”
