Investing in an Individual Savings Account (ISA) is a popular way for UK residents to grow their money without paying tax on the interest or investment gains. However, it’s surprisingly easy to make a simple mistake such as paying into two of the same type of ISA in a single tax year. This error might seem small, but it can have significant consequences if not addressed promptly. Understanding the rules around ISAs, what happens if you’ve paid into two ISAs by mistake, and how to fix it, is essential to ensure compliance with HMRC regulations and to avoid unnecessary penalties.
Understanding ISA Rules in the UK
Types of ISAs
There are several different types of ISAs, each with specific features and rules:
- Cash ISA– A savings account with tax-free interest.
- Stocks and Shares ISA– An investment account with tax-free capital gains and dividends.
- Innovative Finance ISA– Peer-to-peer lending with tax-free returns.
- LIFETIME ISA– Designed for those saving to buy their first home or for retirement.
- Junior ISA– For children under 18; managed by a parent or guardian.
Annual Contribution Limit
For the 2024/25 tax year, the total ISA contribution limit is £20,000. This allowance can be split across different types of ISAs, but you can only pay into one of each type of ISA per tax year. For example, you can pay into one Cash ISA and one Stocks and Shares ISA, but not two Cash ISAs in the same year.
Common ISA Mistake: Paying into Two of the Same Type
How the Mistake Happens
Many people open a new Cash ISA at the start of a new tax year, forgetting they already contributed to a different Cash ISA earlier. Others may assume that transferring money between ISAs counts as new contributions when it doesn’t, leading to confusion.
Examples of Mistaken Contributions
- Paying into two different Cash ISAs in one tax year.
- Investing in two Stocks and Shares ISAs in the same year.
- Paying into a Lifetime ISA and another type that exceeds contribution limits.
Consequences of Over-Contributing
HMRC treats excess contributions or payments into two of the same ISA type as a breach of ISA rules. The following consequences may occur:
- Your ISA may lose its tax-free status for the tax year.
- You may be taxed on income or gains from the excess contributions.
- HMRC could ask for the excess funds to be removed.
- In serious or repeated cases, financial penalties may apply.
What To Do If You’ve Paid Into Two ISAs by Mistake
Step 1: Don’t Panic
This is a common error, and in most cases, it can be resolved quickly and without penalty if handled properly. Acting swiftly is the key.
Step 2: Contact Your ISA Providers
Speak to both ISA providers involved. Explain the mistake and ask which ISA received the unintended contribution. They may be able to help you report the error to HMRC and advise on how to proceed.
Step 3: Inform HMRC
You must notify HMRC of the error. You can do this by calling or writing to them directly. Provide full details, including:
- The tax year in question
- The type of ISAs involved
- The total amount paid into each account
- Which account was opened first
HMRC will review the situation and may request that one of the accounts be voided for the tax year.
Step 4: Wait for HMRC Instructions
Once HMRC receives your report, they will review your case and determine how to resolve the issue. They may:
- Allow the error without penalty if it’s a genuine mistake and doesn’t exceed the annual limit.
- Invalidate one of the ISAs for that tax year.
- Instruct the provider to remove the excess contributions or return the funds to you.
Step 5: Keep Records
Maintain written communication with both your providers and HMRC. Keeping a paper trail will help if you need to prove your case in the future or reference your situation.
How to Avoid This Mistake in the Future
Plan Your ISA Contributions
Keep track of which ISAs you have contributed to during the tax year. A simple spreadsheet or notes app can help you stay organized.
Use Transfers Instead of New Contributions
If you want to move money from one ISA to another, always use the official ISA transfer process. Transferring does not count as a new contribution and helps you stay within the rules.
Stick With One Provider Per ISA Type
Having multiple ISAs of the same type with different providers increases the risk of errors. Stick with one provider per type or make sure new accounts are only opened in a new tax year.
Check Dates Carefully
Tax years in the UK run from April 6 to April 5 of the following year. Many ISA mistakes occur around this time when people are unclear whether a contribution belongs to the current or next tax year.
Special Cases and Exceptions
Transfers Do Not Count as New Contributions
One common source of confusion is the belief that transferring money from one ISA to another counts toward your yearly limit. It does not. As long as the transfer is done correctly by the providers, it won’t affect your contribution cap.
Split Contributions Across ISA Types
You are allowed to pay into more than one ISA per year as long as they are of different types. For example, you could contribute £10,000 into a Stocks and Shares ISA and £10,000 into a Cash ISA in the same tax year.
Junior ISAs and Lifetime ISAs
Junior ISAs have separate limits and rules. Parents should be cautious when managing these on behalf of children. Lifetime ISAs have specific age and usage conditions, and combining them with other ISA types must be carefully managed to avoid breaching contribution caps.
Making a mistaken contribution into two ISAs of the same type during a tax year is more common than people think. Although the error can seem stressful, it is usually easy to resolve by contacting your ISA providers and informing HMRC. The key is not to delay taking action, as waiting can complicate the resolution process. By understanding the rules, tracking your contributions, and using official transfer methods, you can avoid such issues in the future. Tax-free savings and investments are powerful tools protecting their status by following the ISA rules will ensure you make the most of your money.