What Happens If You Pay Into Two ISAs?
Paying into two ISAs? Learn the rules, consequences, and how to correct dual subscriptions to stay compliant.
Individual Savings Accounts (ISAs) in the UK help individuals save and invest tax-efficiently. Funds within ISAs grow free from UK income tax and capital gains tax, making them a tool for financial planning. Understanding ISA subscription rules is important, especially concerning payments into multiple ISAs.
Understanding ISA Subscription Rules
The UK tax year operates from April 6th to April 5th of the following year. Each tax year, individuals are granted an annual ISA allowance, which for the 2024/2025 and 2025/2026 tax years is £20,000. This allowance represents the maximum total amount of new money an individual can subscribe across all their ISA accounts within that tax year.
Recent changes effective from April 6, 2024, have introduced more flexibility. Individuals aged 18 or over can now subscribe to multiple Cash ISAs and multiple Stocks and Shares ISAs within the same tax year, provided they remain within the overall annual £20,000 limit. However, the rule for Lifetime ISAs remains unchanged: an individual can only subscribe to one Lifetime ISA in a tax year, with a specific annual limit of £4,000 within the overall allowance. The term “subscribe” refers to adding new funds to an ISA. The issue arises when new money is paid into two ISAs of the same specific type, such as two Lifetime ISAs, within the same tax year.
Consequences of Non-Compliance
When an individual makes an invalid ISA subscription, such as paying into more than one Lifetime ISA in a single tax year, HM Revenue & Customs (HMRC) will identify the breach. This identification typically occurs through data reported by ISA managers to HMRC following the end of each tax year. HMRC’s systems cross-reference these submissions to detect any instances where an individual has exceeded their annual allowance or breached the single-type subscription rule where it still applies.
Upon detection, one of the ISAs (or a portion of an ISA) will be deemed invalid for the tax year in question. Generally, if an individual subscribes to two ISAs of a type where only one is permitted, the second subscription made chronologically, or the one that causes the breach, is usually the one invalidated. If both were opened on the same day, HMRC might invalidate the one with the larger amount. The tax-free status of the funds in the invalidated ISA, or the invalidated portion, is lost.
This means any interest, dividends, or capital gains earned on those specific funds will become taxable. For example, if an invalidated Cash ISA held £5,000 and earned £100 in interest, that £100 would then be subject to income tax. HMRC will contact the individual to inform them of the breach and outline the steps required to rectify the situation. This initial communication may request the withdrawal of the invalid subscription amount and any associated gains.
Correcting a Dual Subscription
If an individual discovers they have made a dual subscription error, it is best to address it proactively rather than waiting for HMRC to intervene. If the error is identified before HMRC contacts the individual, they should contact their ISA manager(s) and/or HMRC directly to report the mistake. This proactive approach can simplify the resolution process.
The process for correcting the error involves “unwinding” the invalid ISA or the invalid portion of the subscription. This means withdrawing the excess subscription amount and any gains or income generated from those specific funds. For example, if £1,000 was mistakenly paid into a second Lifetime ISA, that £1,000 plus any interest or growth it earned would need to be removed.
HMRC will calculate any tax due on the invalidated funds, treating them as if they had never been held within a tax-free wrapper. This calculation will consider income tax on interest and dividends, and capital gains tax on any investment profits. The individual will then be responsible for paying this tax liability. Individuals should follow any instructions provided by HMRC or their ISA manager regarding the necessary documentation and payment procedures.