An unexpected bonus of having been through multiple national lockdowns is that it’s given many of us the chance to save.
Expensive foreign holidays, meals out and shopping trips were all off the cards for large chunks of the past two years, although we have been able to indulge again since restrictions were eased.
With that in mind, an Isa – individual savings account – can be a great way to save any extra cash you have. There are several types of Isa including cash, stocks and shares, innovative finance and Lifetime Isas.
You can put money into one of each kind of Isa each tax year, and you do not pay tax on the interest earned on cash in an Isa or from capital gains from investments in an Isa.
But what happens if you pay too much in? Here is all you need to know about what to do if you exceed your limit.
I have exceeded my Isa limit and accidentally put more than £20,000 this tax year. What should I do?
BC, via email
Many people rush to fill their Isas each tax year, meaning mistakes can happen.
For the current tax year savers can put £20,000 in their Isa. You are not allowed to pay more than this into an Isa each year, and you can also only pay into one account of each type of Isa at a time. So you could pay into one cash Isa, one stocks and shares Isa and one innovative finance Isa, for example.
If you realise you have overpaid, the first step after spotting an error is to report it to HM Revenue & Customs. You can do this by calling its Isa helpline on 0300 200 3300 from 9am to 6pm Monday to Friday.
However, even if you do not spot the error, HMRC will see it and make contact with you.
All the Isa information is reported from your provider to HMRC, which will ensure that you have not put too much into the tax-free accounts.
In each tax year a saver can put money into one cash Isa and one stocks and shares Isa. HMRC will identify which had the payment into it that breached the limit. It will then start the process of what it calls “repairing” the Isa – reclaiming that money.
All investments in the Isa that were made after the limit was breached will no longer be eligible for tax exemption. They will be handed back to the investor.
In a cash Isa this process is simple, but in a stock and shares Isa it is a little trickier, as fund units or shares will have to be sold.
HMRC will ensure that interest earned on the money is taxed, and that any tax relief that has already been granted on income is repaid to HMRC. If the Isa limit was exceeded a while ago, it may be difficult to calculate the gains for capital gains tax purposes.
Income “repaired” from the Isa for periods after April 6 will count towards the investor’s personal savings allowance. This gives basic-rate taxpayers an annual £1,000 tax-free allowance, and higher-rate taxpayers a £500 allowance – meaning no tax may be due.
If you spot the error you can fix it yourself, said a spokesman for HMRC: “If an investor knows which Isa was in breach of the rules they can make a withdrawal from that account to remove the excess funds. But it is important that they know in which Isa the breach occurred.
“Where this happens, HMRC will still write to the investor – this is because the Isa manager will report the overall position in terms of the subscriptions made to each Isa. So HMRC will still be made aware that a breach occurred. In this situation the investor should be able to provide the necessary evidence to demonstrate that they voluntarily withdrew the excess funds on realising the error.”