2 cash isa paid in for the last year

ruddin1

Last year I opened a new cash isa account with a different bank that was offering higher interest rates. I ended putting money into both the new and old cash isa accounts over the last year going over 20k in combination of both since last year and still put money into the accounts this financial year. I completely misunderstood the rules and thought you could have multiple isa accounts so long as you don't go over 20 k for each. Now that it's been made clear to me what I did wrong I'm not sure what to do and what the consequences will be.

Can anyone advise me what I should do or what will happen with hmrc? Am I looking at a fine or loss of my money?

Any and all help is appreciated 

eskbanker

No, you're not looking at a fine or loss of money - anecdotally HMRC will often ignore a first 'offence' but if you've funded multiple cash ISAs in both 2020-21 and 2021-22 then they're less likely to overlook this year's one.  However, if they choose to take any action it would probably take the form of deeming the second ISA to be invalid, although it may be repairable - their guidance (to ISA managers) is shown at https://www.gov.uk/guidance/close-void-or-repair-an-isa-if-youre-an-isa-manager 

Best thing will be to await contact from HMRC....

ruddin1

Should I contact them first? In the meantime, Should I stop paying into the ISA accounts?

masonic

Stop paying into the second cash ISA you've contributed to during this tax year. If the second ISA is a flexible one, you could flexibly withdraw your 2021/22 contributions and pay them into the first ISA. The first one to receive funds in this tax year is the valid one. Other than that, there is nothing you can do to make the situation better, and no point notifying HMRC as they won't act until they receive the annual returns from the ISA providers and have all of the facts.

ruddin1

Thanks. I appreciate the advice. I assumed coming forward would look better than them finding out themselves? Or does it not matter much?

masonic

ruddin1 said:

Thanks. I appreciate the advice. I assumed coming forward would look better than them finding out themselves? Or does it not matter much?

When you phone the HMRC helpline (after waiting) you'd speak to a front line customer services rep who would tell you to wait for them to contact you. Notifying them proactively won't change anything, and probably won't even be logged. There will be people who have made this mistake who won't even realise it was a problem until they are notified.

jamesd

A modification to what masonic wrote, if the second is flexible withdraw this year's money from that one but if it isn't, and the first is, you can withdraw from the first instead. This is because the flexible ISA feature treats it as never having been paid in at all, so removing from the first will let you continue to use the second.

ruddin1

Thank you. That is actually really handy information. Let me look into that 🙂

jamesd

That "as if it never happened" aspect of flexible can also be handy with other types of ISA.

Aceace

jamesd said:

A modification to what masonic wrote, if the second is flexible withdraw this year's money from that one but if it isn't, and the first is, you can withdraw from the first instead. This is because the flexible ISA feature treats it as never having been paid in at all, so removing from the first will let you continue to use the second.

This "treat it as never happening" isn't quite true. If you had more than £20k of new subscriptions in total across all ISAs in the tax year at any one time (as is the case for the OP), then HMRC are still entitled to reclaim any tax saved on subscriptions above the £20k limit. I agree that it's unlikely HMRC would be bothered with a minor first offence though. 

Otherwise, you could make a mockery of the limits by subscribing virtually unlimited new cash to multiple flexible ISAs at £20k each on the first day of each tax year as long as you withdrew all but one of them on the last day of each tax year. 

masonic

Aceace said:

jamesd said:

A modification to what masonic wrote, if the second is flexible withdraw this year's money from that one but if it isn't, and the first is, you can withdraw from the first instead. This is because the flexible ISA feature treats it as never having been paid in at all, so removing from the first will let you continue to use the second.

This "treat it as never happening" isn't quite true. If you had more than £20k of new subscriptions in total across all ISAs in the tax year at any one time (as is the case for the OP), then HMRC are still entitled to reclaim any tax saved on subscriptions above the £20k limit. I agree that it's unlikely HMRC would be bothered with a minor first offence though. 

Otherwise, you could make a mockery of the limits by subscribing virtually unlimited new cash to multiple flexible ISAs at £20k each on the first day of each tax year as long as you withdrew all but one of them on the last day of each tax year. 

The annual returns don't contain enough information for HMRC to pick something like this up easily, but they do contain some hints - an ISA that has received subscriptions during the tax year will have a date of first subscription field set, even if all of the money was subsequently flexibly withdrawn and the amount subscribed field would be 0. Having two ISAs of the same type with this field set could be explained away as a self transfer, which is permitted once a tax year for cash ISAs, but if there were multiple ISAs of the same type involved, then that might prompt HMRC to investigate further with the ISA managers, and of course they will have complete records of the activity.

Whether HMRC actually would mine the data to this level, or follow up on such anomalies, is an unknown. It appears they have deprioritised any form of policing of the ISA rules over the last couple of years, perhaps due to the pandemic.