- With the 5 April tax year end deadline approaching, now is a good time to assess your savings and ensure you are maximising your tax-free allowances
- Consolidating your accounts and ensuring they are suited to your specific goals can boost returns
- Six ISA mistakes to avoid and how to make the most of your ISA
Laura Suter, director of personal finance at AJ Bell, comments:
“Anyone who has an ISA will know they are a great way to protect your savings and investments from tax, and to grow your wealth over time. But even the savviest of savers can slip up when it comes to the rules or make some common ISA mistakes that may cost them.”
- Picking the wrong type of ISA
“There are six types of ISA, which means it’s easy to pick the wrong one for your savings or investments. 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. Or 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 government bonus available on the Lifetime ISA.
“Equally, if you’re saving for your child you will want to at least consider a Junior ISA, rather than automatically saving the money in your own ISA. Not every option will be right for you, and you need to check the details of each account.”
- Paying unnecessary costs
“Paying some fees is part and parcel of investing, but one ISA mistake to avoid is paying out too much in charges, as ultimately this will eat into your returns. There are some easy ways to cut your costs, without cutting the investments or service you get. The first is to make sure you’re not buying and selling investments too often. With lots of platforms each time you buy and sell it will cost you money. If you’re investing small amounts and trading often, these fees could quickly take a chunk out of your investment pot.
“Another way to cut charges is consolidating investments. If you have ISAs scattered all over the place you may find you can reduce fees by consolidating them in one place. That may be a result of moving to a lower cost platform or simply avoiding trading in the same investment across multiple accounts. For example, if you hold BP shares in two separate ISAs and decide to sell out, then you will find yourself paying two lots of dealing fees. Holding your ISAs in one place will also make them easier to manage as a portfolio.”
- Not using your allowance
“Everyone over the age of 18 can pay up to £20,000 into their ISA each tax year. Make sure you’re maximising this 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. Those aged 18 to 39 can open a Lifetime ISA and save up to £4,000 each year. Investors with spare money they plan to save and any unused ISA allowance for the current tax year should consider using it before the 5 April deadline.”
- Thinking you can only have one ISA at a time
“An easy ISA mistake that you can avoid is not being aware that ISA rules have changed in recent years, meaning you can have more than one ISA, and more than one of each type of ISA. Changes announced in the Autumn Statement in 2023 did away with the previous rule that you could only pay into one of each type of ISA each tax year. The change means you can have multiple Cash ISAs, for example, and pay into them in the same tax year without breaking the rules. The only exception is with Lifetime ISAs and Junior ISAs, where you can only pay into one account of each type every tax year.”
- Paying too much in
“While everyone has a £20,000 ISA allowance, you need to make sure you don’t pay in more than that each tax year. 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 have a few different Cash ISAs, a Stocks and Shares ISA and a Lifetime ISA, for example, you need to make sure you don’t breach the Lifetime ISA limit or the overall £20,000 ISA limit. 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.”
- Losing track of your old ISAs
“It’s easy to lose track of accounts, log-in details or savings pots over time. But it’s important that you take time to track down these accounts. Firstly, it’s your money and you want to get your hands on it. And secondly, if it’s in a Cash ISA it will likely be earning little interest if the account has been sitting there for a while. Equally, if it’s in investments you need to make sure those investments are right for you. 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 keep track of and reduce your admin.”
