3 ISA tax year mistakes savers make (and how to avoid them)

TLDR:

• Pick the right ISA for your goal. Cash ISAs can suit short-term savings, Stocks & Shares ISAs are usually better for long-term growth, and Lifetime ISAs can be ideal for those trying to save for their first home purchase. Don’t just choose what sounds familiar.
• Use your £20,000 allowance before 5th April. The ISA tax year runs from 6th April to 5th April. Any unused allowance disappears. Use it or lose it, as it doesn’t roll over.
• Don’t accidentally go over the limit. The £20,000 cap applies across all your ISAs combined. If you’re using different providers, keep track of what you’re paying across all your accounts.
• Be careful with withdrawals and transfers. Taking money out and paying it back in can still count towards your allowance (unless it’s a flexible ISA), so make sure you know what you have. Always use the official transfer process.

1. Choosing the wrong ISA type for your savings goal

Different ISA types are designed for different purposes, and picking the wrong one can seriously dent your returns or leave you trapped when you need access to your cash.

What ISA types are there?

Here’s a quick breakdown:

• Easy access Cash ISA – great for short-term savings or an emergency fund, but interest rates may be lower than other accounts. Find out more
• Fixed rate Cash ISAs - Your money is locked away for a set term (for example, one to five years) in return for a fixed interest rate. Great if you don’t need access and want certainty on the interest you’ll get, but early withdrawals usually come with penalties. Find out more
• Lifetime ISA (LISA) – bonus-boosted savings (25% government bonus) for first-time home buyers or retirement, with penalties for other withdrawals. Choose between a Cash Lifetime ISA, where your money earns interest, or a Stocks & Shares Lifetime ISA, where your money is invested. Find out more here.
• Stocks & Shares ISA – better long-term growth potential (5–10+ years), but market ups and downs mean your balance can go up or down. Find out more
• Other ISAs (e.g., Innovative Finance ISA) – involve peer-to-peer lending or alternative assets and carry their own risk profiles.

2. Not making the most of your tax year allowance

Every tax year, you get a fresh ISA allowance - currently £20,000 for most adults - that you can put into one or more ISA types and shelter from UK tax.

Here’s how it works:

• The tax year runs from 6th April to 5th April the following year.
• Your ISA allowance resets at 00:00am on the morning of the 6th April, any unused allowance won’t carry over.
• The full £20,000 can be split across different ISA types (although Lifetime ISAs have a maximum of £4,000 per tax year) - e.g., £4,000 can be put into in a Lifetime ISA and £16,000 into a Cash or Stocks & Shares ISA - but the total can’t exceed the cap. This includes what you save across different providers

Good to know

ISA providers generally cannot see the specific balances you have with other providers, as they do not have access to a shared real-time database of your personal financial information. So it’s up to you to keep track of how much of your £20,000 ISA allowance you’ve used up across providers.

Common ISA allowance pitfalls:

• Leaving it too late in the year. Many savers put off topping up until March or even the last week of the tax year and then miss out because deposits can take a few days to process. Make a note in your calendar to review by early March at the latest.
• Not topping up at all. Some savers don’t even use their allowance because they don’t realise that unused ISA allowance disappears forever. That’s money left on the table!

3. Going over your tax year allowance

Splitting contributions across multiple ISAs sounds clever, but going too far can actually break the rules - and that’s where a lot of people trip up.

How overspending happens:

• Contributing more than £20,000 across all ISAs in one tax year.
• Paying into more than one ISA of the same type (e.g., two Lifetime ISAs) without transferring properly. The rules around this are strict, and breaking them can cancel some tax-free status.
• Withdrawing cash from an ISA and then redepositing it, thinking it doesn’t count — in many cases, it does count against your allowance, unless the accounts are flexible

⚠️ What happens if you go over the limit

HMRC has been stepping up enforcement, and savers are receiving correction notices, which can include tax adjustments and even penalty charges if ISA rules were breached. 

If you do find you’ve accidentally gone over, don’t panic. Contact your ISA provider and HMRC as soon as possible. The sooner the error is corrected, the better.

Final ISA tips before you go

Here are a few friendly reminders to help you make the most of your ISA with no nasty surprises at the tax year end:

✅ Plan your ISA contributions throughout the year, don’t wait until April 5th!
✅ Check ISA transfer rules before switching accounts. Withdrawals and redeposits can count toward the annual limit if not done properly. Find out more here.

✅ Keep track of contributions across all providers. It’s easy to forget deposits made in different accounts and go over the limit without realising.
✅ Understand your long-term goals before choosing an ISA type. What’s right for one goal might be wrong for another.

ISA rules aren’t designed to catch anyone out, but a little preparation and awareness can make a big difference to your savings over time. 

*Fee-free mortgage advice is subject to eligibility, see terms & conditions here.