ISA best practices: 8 things to avoid this tax year

Please see our glossary for information on the financial terms used in this article.

An Individual Savings Account (ISA) is a tax-efficient way to save or invest, allowing you to hold a range of assets – such cash, stocks and funds – without paying tax on any interest, dividends or capital gains. You also don’t need to declare ISAs on your tax return, making them a simple and attractive option for many UK investors.

However, despite their benefits, ISAs are not always used to their full potential. Both new and experienced investors can fall into avoidable traps that limit the effectiveness of their ISA strategy.

In this article, we highlight eight things to try and avoid this tax year to help you get the most out of your ISA.

ISA and Junior ISA tax rules may change in the future. ISA tax advantages depend on your individual circumstances.

1. Holding too much in Cash ISAs

Cash ISAs can be useful for short-term savings, but relying on them for long-term goals like retirement may limit your growth. Low interest rates often struggle to keep up with inflation, which means your money could lose value over time and you may miss out on the higher returns a Stocks and Shares ISA could have delivered.

Learn more about The M&G ISA and The M&G Junior ISA. Please note, we only offer Stocks and Shares ISAs/Junior ISAs.
 

2. Not using your ISA allowance (if you can afford to)

As at the current tax year, UK residents can invest up to £20,000 in total across all of their ISAs combined. This allowance resets every April and cannot be carried forward, meaning any unused portion is lost. Using your full allowance each year allows you to shelter more of your investments from income tax, capital gains tax and dividend tax. It also gives your money more time to grow through compounding (where you earn returns on your returns), especially if invested earlier in the tax year.

Whilst this is a valuable opportunity to grow your savings tax-free, it’s important to remember that using the full allowance should only be considered if its affordable and appropriate for your financial situation. Topping up your ISA should never come at the expense of your emergency savings or short-term financial needs.
 

3. Leaving it too late to invest

With the demands of daily life, it’s easy to postpone ISA contributions until the end of the tax year. Whilst making a last-minute investment is better than not using your allowance at all, investing earlier gives your money more time to grow and benefit from compounding.

Leaving it too late can create a pressure to invest a large lump sum quickly, which may lead to rushed decisions or poor timing – especially if the markets are volatile. In some cases, investors may miss the deadline entirely, losing that year’s allowance for good.
 

4. Putting all your eggs in one basket 

Putting all your money into one type of investment, such as equites (shares) or bonds, can be risky. If that area performs badly, your whole portfolio could suffer. Different types of investments tend to behave differently depending on market conditions. For example, when shares fall, bonds might hold their value or even rise. That’s why diversification (spreading your money across different assets) is so important.
 

5. Overlooking fees and charges

Whilst ISAs offer valuable tax advantages, they’re not immune to costs – and many investors underestimate the impact of fees. Stocks and Shares ISAs often come with fund management fees and platform charges. These costs may seem small at a glance, but over time they can significantly reduce your overall returns.

Imagine you invest £10,000 with a yearly return of 5%. If you paid 1.25% in fees, after 20 years you’d have £20,631. But if you paid fees of 0.5%, you’d have £24,002. That’s a difference of £3,371 – just from lower charges. This shows that even small differences in fees can make a meaningful impact on your long-term outcomes.

For details on M&G fund charges, visit our Charges page.
 

6. Withdrawing instead of transferring

If you want to move all or part of the savings you’ve built up in an ISA over previous tax years to a new provider or switch types (for example, move a Cash ISA into a Stocks and Shares ISA or vice versa), it’s important you always use the provider’s transfer service. This is because if you withdraw and reinvest the funds yourself, your money will lose its tax-efficient status and you will use part of your current annual allowance.

Visit our Transfer your ISA page to find out more about moving your ISA to M&G.

Please note, your current provider may apply a charge when you transfer your investment. Whilst your investment is being transferred it will be out of the market for a short period of time and will not lose or gain in value.
 

7. Forgetting to regularly review your portfolio

Your financial goals, risk appetite and personal circumstances can evolve over time. An ISA that suited your needs five years ago may no longer be the best fit today. Forgetting to review your ISA could mean missing out on better-performing funds, more competitive fees or opportunities to rebalance your portfolio so it continues to support your long-term goals. 
 

To help with the review process, you could ask yourself some of the following questions:

• Are you more or less comfortable with risk than when you first invested?
• Have your plans for your investment changed?
• Have your financial circumstances changed?
• Have your investments performed in line with what you needed them to?
• When are you planning to take your money?

8. Accidentally exceeding the annual allowance

If you hold multiple ISAs with different providers – such as a Lifetime ISA with one provider and a Stocks and Shares ISA with another – it can be easy to lose track of your total contributions and unintentionally exceed the annual limit.

Many ISA providers don’t keep track of the contributions you make elsewhere, so it’s up to you to monitor your overall usage. If you exceed the allowance, the excess amount will not be protected from tax. Any interest or gains earned on the excess portion will be considered taxable income and you may need to declare it to HM Revenue and Customs (HMRC).
 

The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. We are unable to give financial advice. If you are unsure about the suitability of your investment, speak to your financial adviser. The views expressed here should not be taken as a recommendation, advice or forecast.