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9 ISA traps to avoid before this tax year ends

ISAs have had a mini makeover, but the new rules don’t come into effect until 6 April 2024. Here are nine ISA traps to help you avoid tripping up before this tax year ends on 5 April.

Published on 26 Mar 20249 minute read

Written by Alice Haine

While Jeremy Hunt announced several ISA reforms in his Autumn Statement last November, such as allowing savers to subscribe to multiple ISAs of the same type, these won’t come into force until the start of the next tax year on April 6.

So, for now, the existing rules still apply, which may cause confusion for some. Here are nine common ISA traps investors can avoid in the run-up to the end of this tax year. 

Remember ISA rules, and their tax treatment, are subject to change in the future. Investments carry risk, you can get back less than invested.

Trap 1. Not making use of the £20,000 ISA allowance at all

The biggest mistake anyone can make when looking to invest or make cash savings is to not take advantage of the ISA tax-free allowance at all, whether it be a cash ISA or a Stocks & Shares ISA – even if they can only use a portion of it, it’s generally a good idea to contribute what you can.

Saving into a Stocks & Shares ISA allows savers to grow their wealth free of tax on investment gains and income and allows them to withdraw investments when they want without incurring a tax bill on the way out. This is key when you consider the annual capital gains tax exemption and dividend allowance will halve from 6 April this year.

Go deepersee the full list of tax allowances available this tax year.

Trap 2. Not maximising the £20,000 ISA allowance in full

For investors with sufficient funds, not maximising this year’s ISA allowance in full may be the equivalent of leaving your money under a mattress and not letting it work hard with the potential of investment returns. Remember, the value of your investments can go down as well as up and you can get back less than you invested.  

It's good to know once money is stored in an ISA, the tax protection applies year after year. Making your investments as tax efficient as possible is one of the best ways to turbocharge the returns you receive.  But keep in mind ISA tax rules could change in the future.

Trap 3. Paying into two ISAs of the same type

From 6 April this year the tax rules will change to allow savers to subscribe to multiple ISAs of the same type, bar the Lifetime ISA, within the same tax year. This will be useful for investors who want to use more than one provider or have different ISAs for different financial goals.  

Importantly however, the tax rules haven’t changed yet, so for now savers can only contribute to one type of ISA this tax year. This means you can contribute to one cash ISA, one Stocks & Shares ISA, one Lifetime ISA, one innovative ISA, and if you still have one since they were discontinued, one Help to Buy ISA, as long as the total over all of them doesn’t exceed £20,000.

As an example, this tax year you can pay money into both a cash ISA and a Stocks & Shares ISA but not two Stocks & Shares ISAs. 

Good to know – if you think you have breached the rules, call HMRC on 0300 200 3300, who can rectify the situation. Solutions could involve taxing any interest earned or the fund manager refunding the wrongly contributed money. However, if you instantly realise you have broken a rule, simply withdraw the money and keep record of the transactions in case HMRC gets in touch in the future. 

Trap 4. Exceeding the £20,000 annual ISA allowance 

Another common mistake made by investors is exceeding the annual allowance cap of £20,000. If you breach the ISA allowance limit, call HMRC's ISA helpline on 0300 200 3300 and they can help you address the issue.

Trap 5. Choosing the wrong type of ISA for your goals 

Selecting the right type of ISA for each of your financial goals is important – you might need access to some of your money in the short-term or within five years, while the rest of your savings could be working hard for your long-term goals.  

For instance:

  • Cash ISAs might make sense for those that want to access their money for short-term needs, within the next five years
  • Stocks & Shares ISAs could help those able to leave their money untouched for five years or more, and potentially achieve higher returns to pay for longer-term goals such as a child's education or retirement. It's good to remember investments carry risk, and you may get back less than invested
  • Lifetime ISAs work well for younger savers (must be between 18 and 40) keen to purchase their first home or to top up retirement savings, with a 25% government bonus of up to £1,000 on the maximum contribution of £4,000. Again, the rules are complicated and there is a 25% withdrawal charge if people don’t use it to buy their first home or want to access their money before the age of 60 

Go deeperunderstand more about these and other available ISAs and how they work.

Trap 6. Cashing in an ISA rather than transferring it

Any new contribution into another ISA counts towards the annual £20,000 allowance for that tax year whereas initiating a simple transfer from one ISA provider to another does not. Those with larger ISA holdings could lose the tax-free status on a very large chunk of money if the money is taken out, making them liable for unnecessary tax charges.  

When moving an ISA to another provider, it is vital you transfer the ISA rather than close the account, withdraw the money, and then pay the funds into a new ISA.

Trap 7. Worrying that money added to a Stocks & Shares ISA must be invested immediately 

Investors often incorrectly assume they must invest the money the moment the funds are added to a Stocks & Shares ISA. Instead, the money can be added in cash to beat the tax year-end deadline, then they can take their time to make their investment selection. 

If someone opens a Stocks & Shares ISA in the dying seconds of the tax year, it will undoubtedly be the wrong time to develop an investment strategy aligned to their financial goals.

Provided the cash is added to the ISA before tax year end it is considered part of the current tax year’s allowance. Investors can then take their time to make their investment decisions – even if that happens in the next tax year. 

Trap 8. Not taking advantage of your spouse’s or children’s ISA allowance

Remember, it’s not only your £20,000 ISA allowance that can be maximised by the end of the tax year:

  • A spouse or civil partner also has a £20,000 tax-free ISA allowance
  • Children have a Junior ISA allowance of £9,000 each
  • A family of four can potentially stash up to £58,000 free of tax on income and capital gains

Married couples and civil partners have a unique advantage over their unmarried peers: the ability to make interspousal transfers without incurring a tax charge. This means if one partner has utilised their ISA allowance in full, they could transfer assets to their spouse to take advantage of theirs – just remember their other half then becomes the legal owner of those assets so this should only be initiated by those in a strong relationship. 

Similarly, a Junior ISA is a great way for parents to lay the foundations for their child’s financial future by allowing them to build up long-term, tax-free cash savings or higher risk investments.  When you consider all the financial challenges your children are likely to face, from university costs to high house prices and more, helping them build a nest egg now could be invaluable.  

Good to know – any money deposited in a Junior ISA is effectively locked away until the child turns 18, so if a parent needs money for other expenses for their child, they will have to source the funds elsewhere. 

Trap 9. Not maximising your ISA allowance in time

It’s important to remember midnight on 5 April is the point when your application process needs to have completed, not begun. While online investing has made it easier for investors to maximise allowances at the eleventh hour, things can go wrong. A technical glitch or an online provider needing time to process your application or add the funds could cause a saver to miss out on valuable tax-free benefits.

The most important feature to remember about an ISA is its ‘use it or lose it’ status. You cannot carry the ISA allowance into the next year so those that want to max out their allowance must complete any transactions by midnight on April 5. 

How Bestinvest can help ISA investors

At Bestinvest you can choose how to manage your investments with as much expert support as you like. If you have questions about any of the ISA traps mentioned here it’s easy to arrange your free coaching session with a qualified financial planner, with no ongoing commitment.

Looking for reassurance you’re on the right track? Visit our tax-efficient investor hub – it’s full of free resources including online investor tools such as our ISA calculator, expert guides, webinars on demand and insights to help investors save money on potential unnecessary tax charges before this tax year ends.

Investors keen for personalised investment advice can choose between two cost-effective advice packages to help build and maintain your portfolio, from just £295 including VAT.

Prefer to have your investments managed by the pros? You can – our range of cost-effective Ready-made Portfolios are built and managed by the experienced investment team at our parent company, Evelyn Partners, the UK's leading integrated wealth management and professional services firm. And you won't pay more than 0.2% service fees. Find out more about our fees and charges.

Our competitive Stocks & Shares ISA is easy to setup and manage and gives you access to our huge range of quality shares, funds, investment trusts and bonds.  

Open an ISA                  Transfer an ISA

Open a Junior ISA         Transfer a Junior ISA 

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