It’s worth taking a note of your tax-free allowances
There are limits to the tax-free benefits on ISAs (Image: Getty)
HMRC has issued guidance around when it will contact people who owe tax.
The authority was asked to clarify its rules around tax on ISAs. A taxpayer asked for guidance about what they would need to do as they had overpaid into their ISA account.
ISAs are tax-free accounts, where any investment growth or interest earnings are exempt from being taxed. But you only get this benefit as long as you deposit within your yearly allowance.
You can currently pay in up to £20,000 a year into ISAs, which can be divided between cash ISAs and stocks and shares ISAs.
The concerned saver told HMRC: “It’s inadvertent and some of the money has been invested into shares so therefore I am not sure what to do at this point. I have contacted the ISA providers.”
HMRC responded to say they may be sending a letter to the person about the issue. The department said: “You contact the ISA providers in the first instance, if they can’t fix it, then you wait for us to write to you after the end of the tax year.”
The saver responded to say they had been told by their provider to withdraw the excess funds and then contact HMRC about the matter.
The person asked: “If the funds have gone towards buying shares, what is the typical solution that you are requiring when dealing whit this? Just so I know if I should hold off on any investments before April.”
The tax authority replied: “That you pay tax on any interest or gain derived from that excess. This may mean you having to file a self assessment tax return for the tax year, though we’ll try to avoid that.”
Seeking further clarity, the taxpayer than asked when exactly their investment growth would be taxable. They explained: “I’m just unsure about how the proportion of the gain attributed to the amount I’ve oversubscribed will be determined.
“I assume you will let me know but please could you confirm if there’s anything I can do now to make it easier?” To which HMRC replied that this is “for the ISA company to calculate”.
They also told the saver: “We’ll only take action after the end of the tax year, once we have the audit data in from the ISA companies.” HMRC also shared a link to guidance on the Government website about repairing an ISA such as in a case where a person has paid in too much in excess of their allowances.
What happens if I have overpaid into an ISA, above my ISA allowance?
The guidance includes these instructions if an ISA provider finds that a person has overpaid into their ISA for the current tax year: “You can advise the investor the excess and any related gains will be removed to correct the error.
“The investor should provide you with instructions on which subscriptions should be removed. The valid current year investments in a repaired ISA account may keep their tax exemption.”
However, if a person paid too much in a previous year, the advice is: “You should tell the investor that HMRC will contact them in due course. You should not give any advice to customers, as you may not have all the relevant facts or be certain of the action that HMRC will take.
“The valid previous year investments in a repaired ISA account may keep their tax exemption.” If HMRC identifies that a person has oversubcribed without the tax body being notified, they will inform the provider and the saver of the error, and tell them what to do.
In any cases where a person has overpaid into a Lifetime ISA, the provider “must contact HMRC”. If an account holder wants to contact HMRC to discuss an error, they can contact the income tax general enquiries helpline.
The number is 0300 200 3300 and lines are open Monday to Friday from 8am to 8pm, and on Saturdays from 8am to 4pm.
