9 savings mistakes to avoid at the end of a tax year
Chancellor Jeremy Hunt made some major changes to ISA rules in his spring budget that follow some reforms announced in November. But will any of that impact this tax year?
In his autumn statement in November, Hunt announced changes that included allowing savers to subscribe to multiple ISAs of the same type and allowing partial ISA transfers. However, these won't come into force until the start of the next tax year on 6 April.
The chancellor also announced a new British ISA, that will give savers an additional £5,000 allowance to invest in UK shares. Again, this won’t be implemented now as there will be a consultation period first and no clear timeline on when the new ISA will be introduced.
With so many tweaks, changes, and announcements around ISAs, savers must tread carefully to avoid tripping up before this key allowance resets on 6 April.
Alice Haine, personal finance analyst at investment platform Bestinvest shared nine common ISA mistakes to avoid in the run-up to the tax-year-end deadline on 5 April.
1. Not making use of the £20,000 ISA allowance at all
It is the number one mistake on Haine’s list: not take advantage of this tax-free allowance at all — even if they can only use a portion of it.
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“Not everyone has spare cash to fill up an ISA or even assets held outside a tax wrapper that they can transfer in to ringfence them from tax, but ignoring the allowance completely is a mistake,” she said.
2. Not maximising the £20,000 ISA allowance in full
For those that do have sufficient funds, not maximising the allowance in full may lead to regret further down the line.
“Whether making fresh contributions or transferring assets held outside a tax wrapper into an ISA, failing to take advantage of this tax allowance in full is equivalent to leaving your money under the mattress and not letting it toil away and earn interest for you,” Haine said.
3. Paying into two ISAs of the same type
From 6 April, the rules are changing 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, the rules haven’t changed yet, so for now savers can still only contribute to one ISA of each type this tax year. This means adults can contribute to one Cash ISA, one Stocks & Shares ISA, one Lifetime ISA (LISA), one Innovative ISA, and if you have one, as they have been discontinued, one Help to Buy ISA. As an example, you can pay money into both a Cash ISA and a Stocks & Shares ISA this tax year but not two Stocks & Shares ISAs.
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“This can be tricky to keep track of, which is why it is such a common practical mistake savers make. A saver might forget they have a regular payment going into one Stocks & Shares ISA and then mistakenly make a lump sum payment into another,” Haine said.
“If you think you have breached the rules, call HMRC on 0300 200 3300, who can help you rectify the situation,” she added.
4. Exceeding the £20,000 subscription limit
Another common error is paying too much into your ISA accounts and exceeding the maximum subscription limit of £20,000.
The current annual limit of £20,000 has remained the same since April 2017. Savers can currently only contribute £4,000 to a LISA, though this counts towards the £20,000 allowance, so someone who maxes out their LISA only has a £16,000 allowance remaining. Meanwhile, the Help to Buy ISA, for those that still have them, has a cap of £200 per month, which also counts towards the £20,000 limit.
Again, calling HMRC’s ISA helpline on 0300 200 3300 might be useful.
5. Choosing the wrong type of ISA for your savings
Haine warned that people often choose the wrong type of ISA for the goal they are saving for.
“ISAs have complicated rules and different advantages depending on which one you choose so selecting the right type of ISA for each of your financial goals is important to ensure you don’t need access to money in the short-term that should be working hard for your long-term needs,” Haine said.
Cash ISAs, for example, make sense for those that want to access their money for short-term goals within the next five years. However, they may not be right for someone who wants to achieve higher returns to pay for a child’s education or retirement. This is something a Stocks & Shares ISA is more likely to achieve for a long-term investor looking to hold onto their money for five years or more, Haines suggested.
Separately, a Lifetime ISA works well for younger savers looking to purchase their first home or to top up retirement savings, with a government bonus of up to £1,000 on the maximum contribution of £4,000, but the rules are complicated and there is a hefty penalty if people want to access their money early.
6. Cashing in an ISA rather than transferring it
Savers often move their ISA to another provider to take advantage of lower fees or added extras built into the service charges that another provider might offer.
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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. If you close the account and withdraw the money you will use up your annual allowance unnecessarily as the action of closing the account and paying the cash into a new ISA as a fresh contribution means it loses its tax-free status.
7. Worrying that money added to a Stocks & Shares ISA must be invested immediately
Savers maximising their allowance in an investment ISA often wrongly assume they must invest the money the moment the funds are added. Instead, they simply need to add the money in cash to beat the deadline, then take their time to make their investment selection.
If someone is opening an ISA in the dying seconds of the tax year, it will undoubtedly be the wrong time to develop a considered investment strategy aligned to their financial goals.
“Provided the cash is loaded into the ISA before tax year end it is considered part of the current tax year’s allowance. They can then make investment decisions on their own timeline — even if that happens in the next tax year,” Haine said.
8. Not taking advantage of your spouse’s or child’s ISA allowance
It's not just your own £20,000 ISA allowance that needs to be used up by the end of the tax year.
“Your spouse or civil partner also has a £20,000 tax-free ISA allowance and your children each have a Junior ISA (JISA) allowance of £9,000. A family of four can potentially stash up to £58,000 free of tax on income and capital gains so taking full advantage, for those that can afford to, is imperative,” Haine explained.
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Married couples and civil partners have a unique advantage over their unmarried peers, the ability to make interspousal transfers without incurring a tax charge. So, 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, children have a Junior ISA allowance of £9,000. A JISA is a way for parents to lay the foundations for their child’s financial future by allowing them build up long-term, tax-free savings or investments.
9. Not maximising your allowance in time
The final mistake relates to the most important feature of an ISA, which is its "use it or lose it" status.
You cannot carry the ISA allowance onto the next year so those that want to max out their account must complete any transactions by midnight on 5 April.
“Many leave it to the last minute with one Bestinvest client making their final ISA contribution at 11.55pm on 5 April 2023, just five minutes before the tax year end cut off. Such a last-minute approach is risky and could see some people mess up and miss out on this valuable tax-free allowance,” Haine said.
Watch:Chancellor confirms new British ISA to boost investment in the City
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