ISAs are a tax-efficient means of investing your money for the future. Any growth achieved with funds invested in an ISA are free from income tax and Capital Gains tax. To make the most of this opportunity to boost your financial health, there are a number of potentially costly mistakes you should avoid. Not doing so could in fact be costing you money. We’ll discuss ten of these mistakes, explaining why you should avoid them, in this article.
Not using all your allowance
Each tax year, you can invest £20,000 across Stocks and Shares ISAs and Cash ISAs. Until the end of the current tax year, you can split this in any configuration across both ISA types. Changes are coming in April 2027, though, as we explain below. To maximise the growth potential* of your ISA, you should use your full ISA allowance each year, if funds allow. This will allow you to achieve the highest returns possible in the most tax-efficient way. You can invest into more than one ISA, and indeed ISA type, each tax year. However the combined total you can invest across all ISAs is £20,000 per tax year.
Assuming you can carry over unused allowance
Unlike with private pension allowances, unused ISA allowances cannot be carried over to the following tax year. This means, no matter how much of the allowance you use in a tax year, it resets to £20,000 the following tax year. It can be easy to unintentionally delay investing, but don’t fall into the trap of thinking you can make it up the following year. Not only are you losing out on the tax-free status of ISA investments, but the less time your money is invested, the less opportunity there is for it to grow. You could also miss out on the power of compound interest, to its full extent. Find out more about this in our previous blog post.
Ignoring the 2027 ISA changes
As we mentioned earlier, changes are coming to ISAs from April 2027. In the 2025 Autumn Budget, the Chancellor announced that for those under 65, allowances will change. The amount that may be invested into cash ISAs will be limited to £12,000. Stocks and Shares ISA allowances will remain at £20,000. Those over the age of 65 will retain their full cash ISA allowance of £20,000 per year.
If you invest in both cash ISAs and Stocks and Shares ISAs, it’s important not to ignore the upcoming changes. Not doing so, and therefore not preparing accordingly, could mean you’re not best-placed to take full advantage of the tax-efficiencies an ISA offers.
Withdrawing from your ISA too frequently
ISAs are accessible funds, which means you can withdraw funds at any time. This can be beneficial in case of emergency, where no other funds are available, for example a boiler breakdown. However, once funds are removed from your ISA, they no longer have a tax wrapper. They are therefore subject to taxes. Additionally, if you remove funds, and then replace the same amount later, you could be using double the amount of your allowance. For example, if you invest £1000 in your ISA, then remove £500, later reinvesting, a total of £1500 of your allowance will have been used.
Instead, ISAs should be viewed as long-term investments. Not only will this give your money the longest time to grow* but also gives more opportunity for any market volatility to have settled. You can find out more about why long-term investing is the best strategy in our recent blog post.
Not diversifying your investments
A Stocks and Shares ISA invests your money into funds, which in turn hold assets such as bonds, company shares and stocks. As with all investments, their value can rise and fall. This is the nature of the stock market, although global events can sometimes cause additional turbulence. As previously mentioned, investing over the long-term will lessen the impact of any market volatility, giving more chance for growth* to occur again.
Investing in a single fund or even a single industry increases the risk associated with market fluctuations. If all your funds are in one place and the market falls significantly, your ISA will devalue significantly. By diversifying your investment portfolio, not all your investments may be impacted by a market downturn. Or, some may be impacted to a lesser extent than others. This will allow you to mitigate potential losses across your portfolio.
Leaving it until late in the tax year to invest
We would encourage investments into your ISA at any time of the tax year. However by leaving investment until the end of the tax year, to invest as a lump sum for example, you are restricting the growth potential of the investment.
Compound interest is the returns earned on not only the amount originally invested, but the previous interest earned too. The longer your funds are invested, the greater the power of compound interest.
If funds allow, investing regularly throughout the year will give your money the greatest chance to grow*. That said, even if you can invest only at the end of the tax year, it is still good practice to use all your ISA allowance each year where possible.
Closing ISAs to open a new one rather than transferring funds
Where possible you should avoid closing an ISA to open a new one. If you withdraw the funds and reinvest them in a new ISA, you will be using more of your allowance. The £20,000 allowance covers the withdrawal and investment of funds throughout the tax year.
Instead, you can often transfer your existing ISA. As you are not withdrawing the funds to reinvest, you are not unnecessarily using some of your allowance to make the move.
If you’d like the Willday Wealth Management team to look after you ISA portfolio on your behalf, you can transfer your existing ISA. All of your investments will then be looked after under one roof. The process is simple, fast and free. We’re available to help you when you need it.
Failing to review old ISAs
As with any investments, including pensions and ISAs, it is important to review them. You should check that your investments still align with your investment goals. Additionally, older ISAs may still be incurring charges. By finding these now-unused ISAs and transferring the funds within to your current portfolio, you’ll reap several benefits. Not only will you not be paying charges unnecessarily, but your ISA will be of higher value. This in turn will lead to greater growth* and greater potential for compound growth.
Not understanding the impact of Inheritance Tax on your ISA
It is important to understand what will happen to your ISA funds upon your death. They may be left to any beneficiary in your will, or to your next of kin.
In general, ISA funds will form a part of your estate value in Inheritance Tax (IHT) calculations. IHT is currently set at 40% of your estate value that exceeds the £325,000 nil-rate threshold.
ISAs also lose their tax wrapper upon your death. This means that income tax and Capital Gains tax will be due on their value, which may need to be declared via self-assessment.
The exception to these rules is if your ISA is left to your spouse or civil partner. It will not be subject to IHT, and provisions can be made to reinvest in an ISA using an additional exemption allowance.
Being too risk averse and only holding cash ISAs
If you are particularly risk averse, you may choose to save your money in cash ISAs rather than investing in Stocks and Shares ISAs. Whilst this is still good practice as you are undertaking financial planning, growth potential is greater with Stocks and Shares ISAs. Historically, Stocks and Shares ISAs have outperformed cash ISAs in terms of growth. So by holding cash ISAs only, you could be missing out on an increased fund size.
Additionally, as mentioned previously, ISA allowance rules are due to change in April 2027. By holding cash ISAs only, your allowance will be more limited.
How can Willday Wealth Management help you?
Understanding investments can be complicated and confusing, and ISAs are no different. The team of experts at Willday Wealth Management will help minimise your risk of making any of the mistakes we’ve explained here. We will work with you to put together a portfolio of investments based on your financial goals, risk appetite and personal circumstances. We’ll then manage them on your behalf. Call us on 0116 222 0119 or email hi@willdaywm.co.uk to book a consultation.
* With investing, your capital is at risk and you may get less than what you invested.
