With numerous different types of ISA’s available, it’s no wonder the mistakes are made. So what are the most common pitfalls to avoid.
If you have have already opened your account, or about to. It’s pay to recap and revisit some simple mistakes to avoid.
Not using an ISA to hold your investments
By not holding an ISA product, you are creating unnecessary problems as the dividends you receive are dividend tax free and any gains are capital gains tax free.
At present you can receive dividends of only £ 500 per tax year before they become liable to dividend tax at rates of 10.75 (basic rate taxpayers) 35.75% (higher rate taxpayers) 39.35 % (additional rate taxpayers) with effect from April 2026. This isn’t a sizeable amount and could soon easily be exceeded if you create a large portfolio.
With regard to capital gains tax rates, everybody has an annual allowance or exemption on £ 3,000 per tax year. With any excess due at 18% for BR tax-payers or 24% for HR & additional tax-payers. Which again isn’t a vast sum of money and could easily be exceeded through the sale of assets, property etc.
The key advantage to an ISA is that any dividends received or capital gain incurred is completely tax-free. Also they don’t have to be declared to HMRC via self-assessments or need to use accountant or the new making tax digital (MTD) conditions being introduced. So it saves any unnecessary reporting or forms to be filled.
Not using the right type of ISA product
There are numerous types of ISA products available to suit varying needs and aims.
Such as Cash ISA, Lifetime,Stocks & shares, innovative and for children they even have a junior cash ISA and a stocks & shares junior ISA. (no wonder people are confused !)
Cash ISA’s were introduced back in 1999 to replace the so-called Personal Equity Plan, to try and simplify tax-free investing products.
So you need to open or invest in an account suited to you and your investment aims.
Simple example: 1st time buyers should be taking advantage of the Lifetime ISA, as building up saving funds against a house deposit. This account can be opened by anyone aged 18-39, and you can contribute £ 4,000 each tax tax-year and the government will add £ 1000, 25% as free bonus if you max out this allowable contribution.
Anybody new to savings should ideally be putting funds away into a simple cash ISA. So it can got at, in cash of short term issue or emergency.
For those, trying to save for the longer term or to build wealth, should be using a stocks & shares ISA. As the value of stocks and shares normally outperform cash over the medium and long term. The S&P 500 has produced an annual return of about 8-9% since inception.
With regard to Junior ISA’s, parents can contribute up to £ 9,000 each tax-year on behalf of the child. Through the power of compounding it could prove to become a fixable nest egg in later years to cover 1st car, university or travel fees, getting on the property ladder.
Don’t invest all your funds in cash
By all means most financial experts will tell someone to have 3 to 6 months in a simple cash account, to cover emergencies or unexpected costs. But once that figure has been reached, you should ideally put additional funds into stocks & shares, funds, ETF’s etc.
As proved over the means and long term, these asset classes will always outperform cash. Even in recent years, through COVID pandemic, Russia / Ukraines conflict and Donald Trump’s liberation day tariffs’. the markets have all recovered and grown in that short time frame.
By investing in cash, you will be losing thousands of pounds in future years, especially if you are going to invest for many years through the power of compounding. the vast majority of cash accounts will be paid at poor rates of returns and may not even bet inflation. So it’s double whammy in that your wealth isn’t growing but actually losing value in real terms..
If you are new to investing, put your money into a low cost ETF or tracker offered by your platform provider. As you confidence and knowledge grows then expand to individual sectors or companies. But due your due diligence and background research, You won’t get every decision right, but you can try and eliminate your mistakes moving forwards.
What about fees and charges
If you open a stocks & shares ISA, your investment provider will charge you fees to manage the money on your behalf, like any financial institution. Most providers will charge you a % on the amount of money that you invest. So as your portfolio grows you fees should grow in alignment.
Try and eliminate your fees as every penny towards fees and charges, will have an adverse or detrimental effect on building your portfolio’s value in future. It may only be a small amount each month or each quarter but over many years the cost could be quite significant.
Your provider should be fully transparent about any fees applicable, such as monthly admin, or selling and dealing fees. Also what about any fees for re-investment in shares.
I currently use AJ Bell / Youinvest to look after my Stocks & shares and SIPP as they provide great level of service, many different funds and stocks to invest in, financial videos and webinars to help me make better investment decisions.
Summary of charges for stocks & shares ISA:
| Shares account charge: | 0.25% (max £3.50 per month) |
| Funds account charge: | |
| First £0 – £250,000 | 0.25% |
| Next £250,000 – £500,000 | 0.10% |
| Value over £500,000 | No charge |
Shares dealing charges:
Stocks / shares: £ 5.00 (per trade)
Frequent shares dealing charge: £ 3.50 (if you had 10 or more share deals in the previous month)
Fund charges: £ 1.50 (per trade)
Dividend re-investment charge: £ 1.50
Other providers are available, so do a quick comparison in fees, ease of use, and what level of service does the provider offer to simply your investing journey.
- AJ Bell / youngest – https://ajbell.co.uk
- ii – https://www.ii.co.uk/
- Fidelity – https://www.fidelity.co.uk/
- Hargreaves Lansdown – https://www.hl.co.uk/
- Trading212 – https://www.trading212.com/
Waiting until the end of the tax year
As they say – with your allowances use it or lose it. Your annual allowances and limits renew on 6th April at the start of each tax year. Unlike pension contribution or CGT losses, it cannot be rolled over to the following year.
In the hasty rush to beat the end of year deadline, many people may decisions in haste, that they later may regret. Also some providers, may be inundated with fresh applications, so may bring the dates earlier . Or it could be over the Easter holidays and office or platforms are shut.
One criteria, you may consider is do you invest on a monthly basis through automated savings or do you invest lump sums. Most people will set up some direct debit or stand-in order each month and will allocate funds appropriately.
But it has been proved by investing earlier in the tax year, that your investment will normally return a better rate of return as it is invested in the market for the longer term.
As we have seen in recent years, the markets have suffered some very sudden falls in value, based on global events such as Russia / Ukraine conflict, Iran War. So could you allocate funds whilst market are at lower levels, and take advantage of reduced prices or uncertainty in the short term. There’s a great saying that time in the market beats timing the market, and be fearful when other are greedy.
Remember that investing should be seen as a get rich quick scheme, you ideally should invest for the medium or long term.
Hopefully, by considering the key points mentioned above you can eliminate short term ISA mistakes, so you can reach your medium and long term investment aims and goals.
Remember: If you found this blog post useful and informative, please check my other posts on investing, pensions, investment books that I recommend on http://www.moneyminted.co.uk.
So you can reach you investing goals and ambitions in future yers, the world of investing isn’t a get rich quick scheme, it should be safe and boring. But you will get their in the end if you think long term, invest on a regular basis and invest within tax-free wrappers.
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