ISA savers have been warned of some key mistakes to avoid (Image: GETTY)
With the deadline for Britons to max out their ISAs for this tax year, Britons have been warned of some key mistakes to avoid when arranging their ISA savings.
Chancellor Jeremy Hunt announced an additional £5,000 ISA allowance for a British ISA, invested in UK companies, to be added on top of the current £20,000 allowance.
These plans are currently being consulted on with no timeline in place so savers may be confused about how the system work, so now is a good time to read up on the current rules for the tax-free savings option.
Alice Haine, personal finance analyst at wealth manager Evelyn Partners, spoke about nine common ISA mistakes that saver should be wary to avoid.
Not using the £20,000 ISA allowance at all
Ms Haine said this is the biggest mistake people should avoid. She said: “Saving into an ISA allows individuals to grow their wealth free of tax on investment gains and income and withdraw investments when they want without incurring a tax bill on the way out.
“This is key when you consider the steep cuts to the annual capital gains tax exemption and dividend allowance from April when both will halve.
“Another major consideration is the personal savings allowance, which enables savers to earn a set amount of interest before tax charges apply.
“This has remained the same since 2016 and is therefore no match for significantly higher bank and building society savings rates of recent times. It means savers are liable for tax charges on a much lower level of interest.”
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Not maxing out your £20,000 ISA allowance
It’s important to put away as much funds as you can into an ISA as you will reap the tax benefits year after year.
Ms Haine said: “Making your investments as tax efficient as possible is one of the best ways to turbocharge the returns you receive.
“While adding cash to an investment ISA is more straightforward, those with assets such as shares and funds held outside a tax wrapper can carry out a transfer known as Bed & ISA.
“This allows savers to sell existing investments held outside of ISAs, within their existing capital gains tax exemption, and repurchase them in an ISA without incurring a tax charge.”
Paying into two ISAs of the same type
A person can currently only save into one ISA of each type, although the rules are changing from April 6 meaning ISA savers wil be able to save into multiple ISAs of the same type within the same tax year, apart from the Lifetime ISA.
This means you can only contribute into one cash ISA, one stocks and shares ISA and one innovative ISA, and into one of the now discontinued Help to Buy ISA.
Ms Haine said: “If you think you have breached the rules, call HMRC on 0300 200 3300, who can help you rectify the situation.
“This could involve ensuring any interest earned on the money wrongly contributed is taxed or that the ISA manager refunds the money mistakenly paid in.
“However, if you instantly realise you have broken a rule, simply withdraw the money and keep a record of the transactions in case HMRC gets in touch in the future.”
Chancellor Jeremy Hunt set out plans for a new ISA in his Spring Statement (Image: Getty)
Exceeding the £20,000 subscription limit
The current limit of £20,000 has stayed the same since April 2017. Lifetime ISA savers should note they can only put in £4,000 into this account, and this will leave them with £16,000 of their allowance left.
Ms Haine explained: “When you consider the different allowance caps, the fact they are all shared under one headline limit of £20,000 and the likelihood different ISAs are likely to be held with different providers, it’s easy to understand how some people can accidentally contribute too much.”
Choosing the wrong type of ISA for your savings
Savers should be mindful they will get the most out of their ISAs if they leave the funds for the long-term to compound their growth.
The Lifetime ISA can be a great option if you intend to use the funds towards your first home or for your retirement, offering a 25 percent bonus on any savings.
Ms Haine said: “There was huge speculation in the runup to the Budget that the Chancellor would tweak the LISA in the Spring Budget, perhaps cutting the penalty for withdrawing LISA savings to 20 percent or raising the £450,000 cap on the value of the first property a LISA saver can purchase to make it a more useful vehicle for people buying a home in more expensive parts of the UK, such as London.
“However, no reforms were unveiled so LISAs remain unsuitable for people that need short-term access to their cash other than to buy their first home.”
ISA savers have been warned of some key mistakes to avoid (Image: Getty)
Cashing in an ISA rather than transferring it
When switching to a new ISA, It’s vital to go through the process to transfer your ISA funds rather than withdrawing the cash and then putting it in the new account, as this latter option will use up your annual allowance.
Ms Haine said: “This is less of an issue for those with smaller ISA pots, as they are unlikely to use their allowance in full anyhow.
“But it is a headache for those with larger ISA holdings as making the wrong move could see them lose the tax-free status on a very large chunk of money, making them liable for unnecessary tax charges.”
Thinking funds in a stocks and shares ISA have to be invested immediately
A person can take their time after paying into a stock and shares ISA, to decide how they want the cash to be invested.
Ms Haine commented: ” 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.”
Not taking advantage of your spouse’s or child’s ISA allowance
Ms Haine explained the rules, saying: “Remember, it’s not only your £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 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.”
Married people or those in civil partnerships can make interspousal transfers, transferring assets to their spouse to use their yearly ISA allowance.
Not maximising your allowance in time
You need to complete your transfers by midnight on April 5 to take advantage of the £20,000 allowance for the year.
Ms Haine encouraged people to act now, saying: “While online investing has made it easier for investors to maximise allowances at the eleventh hour, things can go wrong.
“A power cut in a storm, a technical glitch or an online provider that needs time to process your application or add the funds could cause a saver to miss out on valuable tax-free benefits.
“Importantly, midnight is the point when your application process needs to have completed, not begun.
“Those actioning a Bed & ISA to transfer investments held outside a tax wrapper into an ISA will also need even more time. Some providers stop accepting Bed & ISA transactions up to a week or more before the end of tax year deadline given it can take a few days for trades to settle.”
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