Tax officials have issued fresh guidance for savers who accidentally pay too much into their Individual Savings Accounts (ISAs), potentially facing an unexpected tax bill. The update from HM Revenue & Customs (HMRC) follows a direct query from a concerned taxpayer who discovered they had exceeded their annual limit.
What Happens When You Exceed Your ISA Allowance?
ISAs offer a valuable tax-free wrapper for savings and investments, but this benefit is strictly limited to an annual subscription limit. For the current tax year, the total amount you can pay into all your ISAs is £20,000. This can be split between cash ISAs and stocks and shares ISAs.
The warning was prompted when a saver contacted HMRC after realising they had made an inadvertent overpayment. "Some of the money has been invested into shares so therefore I am not sure what to do at this point," the individual explained, confirming they had already alerted their ISA providers.
HMRC's Step-by-Step Guidance for Savers
In its response, HMRC outlined a clear course of action. The department advised the saver to contact their ISA providers first. If the providers cannot resolve the issue, the saver should then wait for HMRC to write to them after the end of the tax year.
The saver revealed their provider had instructed them to withdraw the excess funds and then contact HMRC. Seeking clarity, they asked HMRC about the typical solution, especially when excess funds have already been used to buy shares, questioning if they should halt further investments before April.
HMRC's reply was direct: you must pay tax on any interest or investment gain derived from the excess amount. This may necessitate filing a self assessment tax return for the relevant tax year, though HMRC noted it would "try to avoid that."
How Are Taxable Gains Calculated?
When the taxpayer asked for further details on how the proportion of gain attributed to the oversubscription would be determined, HMRC stated this calculation is for the ISA company to perform.
The tax authority emphasised it will only take action after the end of the tax year, once it has received audit data from all ISA providers. HMRC also directed the saver to official Government guidance on 'repairing' an ISA, which covers situations where someone has paid in above their allowances.
Official Rules for ISA Providers and Savers
The published guidance details specific procedures. For overpayments made in the current tax year, ISA providers can advise the investor that the excess and any related gains will be removed to correct the error. The investor must instruct the provider on which subscriptions to remove.
For overpayments from a previous tax year, the rules differ. Providers should tell the investor that HMRC will contact them in due course and are advised not to give specific advice, as they may not know what action HMRC will take.
If HMRC itself identifies an oversubscription that hasn't been reported, it will inform both the provider and the saver and instruct them on the next steps. The process is distinct for Lifetime ISAs, where the provider must contact HMRC directly.
Savers who need to discuss an error with HMRC can use the income tax general enquiries helpline on 0300 200 3300. The line is open Monday to Friday, 8am to 8pm, and Saturdays from 8am to 4pm.
