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5 ISA mistakes to avoid

by Leeds Building Society

An individual savings account (ISA) can be used for a range of savings ambitions. Different types of ISAs can provide various levels of flexibility – and you don't necessarily need a large sum of money to open an account. Most importantly, you'll earn tax-free (*1) interest, up to the ISA allowance every year (£20,000 of savings in the 2024/2025 tax year (*2, *3).

We know the world of ISAs can be complicated, and sometimes we're left asking 'are ISAs worth it?' There are misconceptions around ISAs and how to use them that might mean you're not getting the best from yours. With that in mind, we've come up with the five top ISA mistakes to avoid so you can make sure you're getting what you need from yours.

1. Picking the wrong type of ISA

Look at our What is an ISA? guide and you'll see there are four main types of ISA available: Cash ISAs, Stocks and Shares ISAs, Lifetime ISAs, and Innovative Finance ISAs. At Leeds Building Society, we offer Cash ISAs only.

All four serve different purposes for different types of savings ambitions. Choosing the right one for your needs will come down to factors such as what you're saving for, how long you want to save for, how much access you need, and if you want your interest rate to be fixed.

Understanding which type of ISA is best for your needs should be your first step, as choosing the wrong one could affect the way you save.

What are the different types of ISA?

  • Cash ISAs: offer a similar function to a regular savings account with a tax-free (*1) wrapper on interest earned. You can choose different types of Cash ISA to suit your needs, including Fixed Rate Cash ISAs, Limited Access Cash ISAs, and Instant Access Cash ISAs. Cash ISAs are available to individuals aged 18 or over who are resident in the UK for tax purposes.
  • Stocks and Shares ISAs: offer the same tax-free (*1) benefits as other ISAs. Your investment may go up or down based on stock and shares market activity.
  • Lifetime ISAs: aimed at first time buyers and those looking to save for retirement. You can save up to £4,000 each year and could get a 25% bonus on whatever you've saved annually. If you want to keep this bonus, you'll need to use the money for a first house deposit or withdraw it after you turn 60.
  • Innovative Finance ISAs: offer tax-free (*1) interest on savings income from peer-to-peer loans, crowdfunding debentures and cash investments, but are not protected by the Financial Services Compensation Scheme.

2. Not using your allowance

Every person who opens an ISA gets the same ISA allowance, which lasts through the tax year. Your ISA allowance is the amount you can put into your ISA(s) without paying any tax on the interest earned. Once the new tax year starts again, that allowance resets. So, it makes sense to maximise your allowance as best you can and benefit from as much tax-free interest as possible.

How much can you put in an ISA?

The current annual ISA allowance is £20,000. That means you can save up to £20,000 each year and earn tax-free interest.

3. Thinking you can only have one ISA at a time

One of the most common misconceptions of ISAs is that you can only have one open at once. So, how many ISAs can you have? As many as you want, to some extent. This means, depending on your goals, that you can diversify your ISA portfolio as you see fit.

The important thing to know is that you can only put money into one of each type  of ISA each tax year. So, if for some reason you have three Cash ISAs and two Stocks and Shares ISAs open at the same time, you'll only be able to deposit money into one of each of those in the same tax year. On top of that, your ISA allowance applies to your entire ISA portfolio rather than for separate types of ISA. This means you can only gain tax free interest on £20,000 of your savings in total across all your ISAs, no matter how and where you put your money.

4. Losing track of your old ISAs

If you've been using ISAs for a while, make sure you don't lose track of old accounts. Performance of certain types of ISA (like Stocks and Shares ISAs or Variable Rate ISAs) can go up or down dependent on the base rate. That means old ISAs might not be doing as well for your money as they could be.

The good news is you can easily transfer and consolidate your old ISAs into new ones subject to the terms and conditions of your account. Transferring doesn't affect your ISA allowance and it can tidy up your finances.

5. Forgetting about the kids

ISAs aren't just for adults. If you're looking to save money on behalf of your kids for the future, a Junior ISA could be a great way to do so. You'll be the authorised signatory on the account, and you can save for your child up until they turn 18. The ISA allowance for junior accounts is lower at £9,000 per year, but you'll still get the tax-free interest benefit on a variety of ISA options, from simple Cash ISAs through to Stocks and Shares ISAs.

There could be an ISA that works for you

With a wide variety of Fixed Rate, Variable Rate, and Easy Access Cash ISAs available, we think there's a Cash ISA in our range that could work for you. If you'd like to know more about Cash ISAs and how they work, look at our blog on how Cash ISAs work.

You can also head over to the rest of our Knowledge Base to find more useful information for savers, home buyers and more, or compare our full savings range online today.

*1 - Tax-free means that interest payable is exempt from income tax.
*2 - The tax treatment depends on the individual circumstances of each customer and may be subject to change in the future.
*3 - Deposits in any tax year are subject to the limits set by HM Revenue and Customers (HMRC) and may therefore be subject to change.

 

This guide is intended as a summary only and does not constitute legal or financial advice given by Leeds Building Society. No reliance should be placed on this guide. We recommend that you seek independent legal advice and/or financial advice if you have any questions or queries.