Skip to the content

The most common ISA mistakes and how to avoid them

16 March 2023

Personal finance experts share the traps investors often fall into with their ISA.

By Tom Aylott,

Reporter, Trustnet

ISAs are one of the few ways investors can squirrel away their cash without leaving it open to raids from the taxman, making them a must-have for the majority of investors.

With the deadline to use up this year’s £20,000 allowance fast approaching on 5 April, investors will be looking for ways to make the most of their ISA budget, but there are easy mistakes that all too many of us make at this time, according to the experts.

Here, Trustnet asks personal finance professionals for the most common errors people make with their ISA in the final months before the end of the financial year and how to avoid them.


Don’t buy this year’s winners

Investors often fall into the trap of looking at which funds have performed best over the past year and buying those, according to Rob Burgeman, senior investment manager at Brewin Dolphin.

He said: “A seasoned professional can often tell when an ISA was taken out by which holdings are held. Last year’s ISA vintage will be full of technology and high-growth funds and this year’s vintage will, doubtless, be full of value funds.”

Short-term outperformance can be attractive on face value, but it can be followed by periods of more stabilised returns – funds that benefited from a rally over the past year might not be as popular moving forward.

Alice Haine, personal finance analyst at Bestinvest, agreed, stating that chasing short-term winners is no substitute for careful portfolio construction.

She said: “Investors often take an ad hoc approach to selecting funds each year, buying whatever funds or trusts are currently doing well or being heavily tipped as free-standing decisions, rather than considering how these will fit as part of a wider, well-constructed portfolio.”


Pay attention to your existing portfolio

Haine added that investors first need to look at which funds they already hold in their ISA and consider how any new additions might fit in with them.

Buying a new fund without considering your pre-existing portfolio could leave your ISA heavily reliant on a few investments, adding a significant deal of risk.

Haine said: “Failing to review a portfolio can see it skewed towards an out-of-favour investment style, that needs drastic refreshment.”

When looking at what they already hold in their ISA, investors need to think about which funds still deserve a place in the portfolio, according to Laura Suter, head of personal finance at AJ Bell.

She said: “Once a year you want to take stock of how your investments have performed and make sure that you’re happy with how the portfolio looks.”


If a fund has done well over the past year, investors might want to consider selling out of it and buying one that has performed poorly which could benefit from a rebound in future.

Suter said: “While it can feel counterintuitive to sell the stocks or funds that have risen and buy more of the ones that have fallen, that’s the theory you should be sticking to.”

It can be tempting to keep adding keep adding growth funds to your ISA, but this is only fruitful if you keep looking back and rebalancing your portfolio, Burgeman added.

He said: “A more balanced approach is often the best way – a portfolio, diversified by asset type and style bias, can produce less volatile returns that can weather the inevitable market storms better.”


Don’t worry about timing

Investors may be hesitant to invest their money in markets given the current volatility but waiting for the perfect moment would be a mistake, according to Myron Jobson, senior personal finance analyst at interactive investor.

He said: “Amid volatile markets, some people delay contributions until the waters settle – but ultimately no one short of a functioning crystal ball can say for sure when this might happen.”

Indeed, investing your money now will be more rewarding over the long-term than holding off for a sunnier day, even if it means your ISA going through a bumpier road in the short term.

Jobson added: “Regularly drip-feeding money into your investments can help take emotions out of investing while mitigating investment risk and smoothing out the inevitable bumps in the market, buying fewer shares when prices are high and more when prices are low.”

Likewise, Sarah Coles, head of personal finance at Hargreaves Lansdown, said that the fear of a negative return deters many people from investing in the first place.

However, putting money into your ISA incrementally through periods of volatility leads to better returns over the long-term than leaving it sat in a cash account.

Coles said: “People rule out a stocks and shares ISA because of a misunderstanding. Some think they can’t get a last-minute stocks and shares ISA because they don’t want to invest it all right now – but you can secure your allowance now and invest it gradually.”


Don’t leave it to the last minute

Although investors shouldn’t worry about timing the market, Jobson said that those looking to use this year’s allowance should do so sooner rather than later.

The deadline to use up this year’s allowance may be 5 April, but those looking to transfer investments from a general savings account into an ISA (known as bed and ISA) is 31 March.

This brings those investments under the tax benefits of an ISA, but not many people know that they have less time to do it, according to Jobson.

He said: “With allowances for capital gains and dividend taxes set to fall significantly come the new tax year, investors with substantial assets held outside of the ISA and SIPP tax wrapper might want to pay attention to the bed and ISA deadline.”

Haine also reminded investors that bed and ISA transactions take much longer, but added that even buying new funds for your ISA can be held up by delays.

Fund platforms experience more traffic than normal near the deadline, so those leaving it to the last minute could miss the boat to technical difficulties.

Haine said: “Ultimately, the biggest mistake of all is not utilising your £20,000 ISA allowance by the deadline at the end of the tax year.

“This is a ‘use it or lose it’ allowance that you cannot backdate, so take action before the 2022-23 tax year ends at midnight on 5 April and it is too late.”


Make the most of your allowance

If investors have any of their allowance left over this year, they should try and use up the rest of it now, according to Suter.

From next month, the threshold investors can earn dividends without paying tax is being halved from £2,000 to £1,000. Not long after in April, the total amount people can earn tax-free will be dropping from £12,300 to £6,000, so those who haven’t protected their assets in an ISA yet may regret it come 5 April.

Suter said: “The biggest ISA mistake is not taking advantage of your allowances this tax year and losing them – especially given the imminent slashing of the dividend and capital gains tax allowances.”

Editor's Picks


Videos from BNY Mellon Investment Management


Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.