What happens if I overpay into my ISA?

It’s an easy mistake to make if you’ve got several ISAs

Every tax year you can pay up to £20,000 into an ISA or across different ISAs if you’ve got several accounts. Any interest or gains you make are then shielded from tax. 

Lots of people have asked us what happens if they accidentally go over their allowance and pay too much into their ISA in a tax year – and how to get the problem sorted.

Here’s everything you should know.

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What is an ISA allowance?

An ISA allowance is how much money you can pay into your ISA – or ISAs – every tax year.

Currently, it’s £20,000 and you can split this how you want among different types of ISA, though within that is a separate £4,000 cap for the Lifetime ISA. So, for example, you could put £8,000 into a Cash ISA, £8,000 into a Stocks & Shares ISA and £4,000 into a Lifetime ISA between April 6 and April 5. 

It’s worth noting that if you’ve opened a Junior ISA for your child, they have their own £9,000 a year allowance which doesn’t have any impact on yours. 

As soon as the new tax year starts, your allowance resets – so if you’ve not used it, you can’t carry it over. 

What are the consequences of overpaying your ISA?

As we know, the main draw of using an ISA is the tax benefit. But if you pay too much into your ISA, any money you contribute that’s over the £20,000 limit will not be shielded from tax. 

So any interest you’ve made on that overpayment into a Cash ISA will be seen as taxable income if it’s outside your Personal Savings Allowance. Likewise, any growth or dividends in a Stocks & Shares ISA will be taxed if they go over your other investing tax-free allowances.

You’ll not be charged a penalty for your mistake but there might be tax to pay if you’ve earned interest or made gains on money that shouldn’t be in the ISA in the first place.

And if your overpayment is refunded, you’ll lose any gains you’ve made.

How can you end up paying too much into your ISA?

It’s quite easy to lose track of your contributions if you’re paying into multiple ISAs, especially if it’s over several tax years. 

New rules introduced in April 2024 mean that you can open and pay into as many ISAs of the same type as you like in the same year (before you could only pay into one of the same type), so you can have lots more accounts and it can get confusing.

What’s more is that your different ISA providers could be showing you incorrect information about how much of your allowance you’ve used up – because they’ll only know what you’ve added to the account you hold with them, and probably not what you’ve added to your ISA with a different provider .

For example, if you’ve paid £6,000 into a Stocks & Shares ISA with one provider and £14,000 into a Cash ISA with another, your Stocks & Shares ISA provider will probably say you’ve still got £14,000 of your allowance remaining for that year. So don’t trust it!

If you’re only paying into one ISA or several ISAs with one provider, it’s a lot harder to overpay as some providers limit your contributions.

Check if you’ve actually overpaid

Now, the first question you need to ask yourself is whether you’re sure you’ve paid in more than £20,000 in a single tax year. What’s made you think that?

First, ISA transfers also don’t count towards your allowance. So if you’ve got money from previous tax years in different ISA accounts, you can transfer it to other providers without it eating into the £20,000 a year allowance.  

And if it’s because you’ve got more than £20,000 across your accounts, it could be as a result of contributions from previous tax years. As your allowance resets at the start of every tax year, you may have built up a larger balance in your ISAs. But that’s ok. Remember, it’s only the money added in the current year that counts towards your allowance.

Plus, any gains you make don’t count towards the annual ISA cap. So if you’ve earned interest on your Cash ISA or returns on your investment ISA and increased your balance as a result, it’s separate from your annual allowance. 

The best thing to do is check your contributions across different ISAs for the current tax year to work out whether you’ve overpaid or not.

What to do if you’ve overpaid your ISA

If you’ve paid too much into your ISA, it’ll need to be what HMRC calls ‘repaired’. Basically, some actions will need to be taken to undo your mistake and make sure you’re not benefitting from the error. 

However, what happens next depends on when you’ve made the overpayment. 

If you’ve exceeded your ISA allowance in the current financial year, you should contact your provider as soon as you can. 

It’ll then be up to them to attempt to refund your overpayments to make sure you’re back within your £20,000 annual allowance and remove any interest or returns you’ve earned, when you shouldn’t have. Or you can arrange for your investments to be kept, but just outside your ISA.

If the overpayment was made in a previous tax year, you’ll need to wait to hear from HMRC. It’ll work out how much you’ve overpaid by and how much tax you owe on your interest or profits. 

Now, I’ve seen conflicting advice about whether to withdraw the money you’ve overpaid yourself – HMRC has told me you can do this if you’ve made the overpayment in the current tax year but it says something different online. 

So it’s probably best to speak to your provider first and if you’re unsure of what to do you can always call HMRC on 0300 200 3300. The line is open Monday to Friday between 8am and 6pm and it’s closed on weekends and bank holidays.

I’ve used up my ISA allowance – what should I do?

If you have additional cash savings after exceeding your annual ISA allowance, perhaps you’re a higher earner or have received a bonus from work, then you’ll need to think of where to put your money.

There are loads of options that could include:

• Making additional contributions to your pension (and maybe increase the free money you’re getting from your employer too)
• Overpaying your mortgage to reduce how much you’ll pay in interest
• Use your partner’s various savings and investing allowances
• Broadening your approach to investing 
• Sticking the money in Premium Bonds in the hope you win a decent tax-free prize! 

You can focus on one of these things or take a combined approach and do a few. Not all of these options will be suitable for everyone and you’ll need to consider your financial situation and your overall goals.