ISAs (Individual Savings Accounts) are one of the UK’s most powerful vehicles for tax-efficient saving and investing. With generous tax advantages and a wide range of account types, they can help you build wealth over time, provided they are used wisely.
However, many savers and investors make costly ISA mistakes that can reduce returns, trigger avoidable tax, or even lose the benefit of an annual allowance.
In this Moneyfarm blog we will take a closer look at the most common ISA investing mistakes and how you can avoid them.
1. Failing to Use Your ISA Allowance Before the Deadline
Every UK resident over 18 is entitled to an annual ISA allowance of £20,000 for the 2025/26 tax year.
The allowance operates on a ‘use it or lose it’ basis: if you don’t use your full allowance by 5 April, you can’t roll it over into the next year.
Example: Lisa, 34, planned to invest £5,000 in her Stocks & Shares ISA but missed the deadline. That unused allowance was lost permanently, along with the opportunity to protect those savings from tax.
Tip: Set a reminder for mid-March and review your finances in advance to make additional contributions where possible.
2. Selecting the Wrong ISA Type for Your Goals
ISAs serve different purposes, and choosing the wrong type may lead to missed opportunities or unnecessary risk.
- Cash ISA: Suitable for short-term savings, but interest rates are often low and may not keep pace with inflation.
- Stocks and Shares ISA: Suited to long-term investing, with potential for higher growth but subject to market fluctuations.
- Lifetime ISA: Designed for first-time home buyers and retirement savings. Contributions are capped at £4,000 per year, with a 25% government bonus. Available to individuals aged 18–39, with contributions permitted until age 50.
- Innovative Finance ISA: Involves peer-to-peer lending and carries a higher risk, including the possibility of capital loss.
Example: Alex, 40, kept all his long-term savings in a Cash ISA earning 1.5% interest. Over 10 years, he missed out on the compounding growth that a diversified Stocks & Shares ISA might have delivered.
Tip: Match your ISA choice to your time horizon and risk tolerance. For short-term goals, a Cash ISA may be appropriate. For long-term growth, a diversified Stocks & Shares ISA is often more suitable.
3. Overlooking Fees and Charges
While ISAs themselves are tax-free, investment platforms and fund managers may charge fees, which can significantly reduce returns over time.
Charges to look out for include:
- Platform fees
- Fund management fees (Annual Management Charges, or AMC)
- Exit charges (on transfers or withdrawals)
Example: Claire opened a Stocks & Shares ISA with a major provider but did not realise she was paying 1.2% in ongoing charges. Over 10 years, those charges reduced her returns by more than £5,000 on a £30,000 investment.
Tip: Always review the fee structure before investing. Even small differences in charges can make a substantial impact over time.
4. Not Reviewing or Rebalancing Your Investments
Many ISA investors adopt a “set and forget” approach to their portfolios. However, markets can be turbulent, and investment strategies should be reviewed and adjusted accordingly.
Example: David, 55, invested heavily in technology stocks in 2021. Following the market correction in 2022, his ISA fell by 18%. Regular portfolio reviews could have helped him reduce risk and rebalance his holdings.
Tip: Review your ISA portfolio at least annually. Rebalance where necessary to keep your investments aligned with your risk profile and long-term objectives.
5. Withdrawing Funds Without Understanding the Rules
Not all ISAs allow you to withdraw funds and replace them without affecting your annual allowance. Only Flexible ISAs permit this feature, and many ISAs are not flexible.
Example: Priya withdrew £3,000 from her ISA for an emergency expense. A month later, she attempted to replace the funds, only to discover she had already used her annual allowance and was unable to do so.
Tip: If flexibility is a priority, confirm that your ISA is designated as “flexible” before making a withdrawal.
6. Transferring ISAs Incorrectly
You can transfer ISAs between providers to obtain better rates or features, but this must be done through a formal ISA transfer rather than by withdrawing the funds directly.
Example: Tom wanted to switch providers, so he withdrew £20,000 from his ISA and opened a new account. As he had not requested a formal transfer, the new deposit counted towards his annual allowance, preventing him from making further contributions that year.
Tip: Always initiate ISA transfers through your new provider, who will manage the process while preserving your tax-free status.
7. Keeping All Savings in Cash Long-Term
Cash ISAs provide security and easy access, but over long periods their returns may fail to keep pace with inflation. This means that while your balance grows, the real value of your money could decline.
Example: Emma, 38, kept £15,000 in a Cash ISA for over a decade. With interest averaging 1%, her savings grew slowly, while inflation rose by more than 2% each year. In real terms, her purchasing power fell.
Tip: Use Cash ISAs for short-term savings or emergency funds, but consider Stocks & Shares ISAs for long-term goals where growth potential is important.
8. Ignoring Inheritance Tax Treatment
Although ISAs are tax-efficient during your lifetime, they usually form part of your estate for Inheritance Tax (IHT) purposes. This means they may be taxable on death, which can come as a surprise to many investors. The main exception is the Additional Permitted Subscription (APS), which allows a surviving spouse or civil partner to inherit the ISA allowance.
Example: After Mark passed away, his £50,000 ISA was included in his estate and counted towards IHT. His wife, however, was able to use the Additional Permitted Subscription rules to continue sheltering the funds in her own ISA.
Tip: If estate planning is a priority, factor in how your ISA will be treated on death and consider professional financial advice to explore available allowances.
Making the Most of Your ISA
Avoiding common mistakes can make a substantial difference to the long-term growth of your savings. Whether you are preparing for retirement, saving towards a first home, or aiming to make your money work more efficiently, using your ISA appropriately is essential.
Tax-efficient growth is a valuable benefit, but it only delivers its full potential when combined with fully informed decisions and a disciplined approach.
If you are uncertain whether your current ISA arrangements align with your objectives, consider seeking guidance from a regulated financial adviser who will help ensure that your strategy remains effective and well-suited to your circumstances.
Key Takeaways
- Use your ISA allowance before the 5 April deadline — it cannot be rolled over.
- Select an ISA type that suits your savings goal, whether short-term security or long-term growth.
- Be aware of all charges, even small percentage fees compound into large sums over time.
- Review your portfolio annually and rebalance to stay on track with your risk profile.
- Confirm whether your ISA is flexible before withdrawing funds.
- Always transfer ISAs through the new provider to avoid losing tax benefits.
- ISAs do not usually avoid Inheritance Tax, except through spousal Additional Permitted Subscriptions.
*As with all investing, financial instruments involve inherent risks, including loss of capital, market fluctuations and liquidity risk. Past performance is no guarantee of future results. It is important to consider your risk tolerance and investment objectives before proceeding.
