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online technical resource

ISA allowances:

our approach to compensation where a consumer misses their annual ISA allowance because of a business error

This section of our website explains our approach to cases where a consumer has been unable to take up their Individual Savings Account (ISA) allowance in a particular tax year – because of something that a financial business did wrong (or failed to do).

In the cases we see, our usual approach is to tell the financial business to compensate the consumer for any financial loss they are likely to incur – as well as for any distress and inconvenience that may have been caused.

what type of cases do we see?

Most cases we see are where a consumer tried to make an investment (or deposit cash) into an ISA towards the end of a tax year (5 April) – but the financial business was unable to carry out the instructions in time.

We also sometimes see cases where this happened when the consumer tried to top up their ISA during the tax year.

In these cases, it means that the consumer was unable to use their ISA allowance (or part of it) for that particular tax year – and could be disadvantaged as a result.

If we are satisfied that it was the financial business’s error that led to the consumer not being able to use their allowance, we will consider whether compensation is appropriate.

There are two types of ISA:  

Working out the financial loss that a consumer may have incurred – through missing an opportunity to invest in a stocks-and-shares ISA – is usually more difficult than working out the loss in relation to a cash-ISA.

This is why we focus below mostly on our approach to complaints about missed allowances that involve stocks-and-shares ISAs.

stocks-and-shares ISAs

When working out how much financial loss the consumer is likely to incur – through missing an opportunity to use their stocks-and-shares ISA allowance – we generally start by assuming the consumer would have made the same investment at the same price. We then work out how much they would lose out – through not holding that investment within an ISA.

How far the consumer will lose out financially – by not holding the investment within an ISA – depends on:

  • how quickly the missed ISA can be replaced;
  • the consumer’s tax status; and
  • how that investment is liable to tax.

how quickly the missed ISA can be replaced 

Consumers who miss out on using their allowance in a particular tax year can often put this right in a later tax year. When we look at how long it will be before a consumer can make good on a lost opportunity to invest in an ISA, we consider whether they:

  • had consistently used their ISA allowance in previous tax years; and
  • have savings, investments or surplus income to put into an ISA in future tax years.

For example:

  • Mr A missed out on a stocks-and-shares ISA for one tax year. He did not plan to use his ISA allowance in the following tax year. So he could replace the missed ISA immediately by investing the money (or moving the investment) into an ISA using his allowance for the new tax year.
  • Mr B missed out on his stocks-and-shares ISA for one tax year. He had enough money and investments to use up his stocks-and-shares ISA allowance for the next five tax years. But after that he did not plan to use his ISA allowance. So Mr B could replace the missed ISA after five tax years.
  • Mrs C missed out on her stocks-and-shares ISA allowance in one tax year. She had enough money and investments to use up her stocks-and-shares ISA allowances for the foreseeable future. And she had been making full use of her allowances for many years.

    This meant that Mrs C was unlikely to be able to replace the missed ISA by using a spare allowance from a future tax year. So Mrs C’s investment would stay outside an ISA for as long as she retains it.

    In these circumstances, we generally assume that this will be for a period of ten years – unless there is evidence to suggest otherwise.

could the consumer be liable for extra tax?

If a consumer holds an investment outside an ISA, they may be required to pay tax on:

  • the returns it generates while they hold it; and
  • the money generated by selling it.

Not all consumers have to pay tax on the returns from investments held outside an ISA. For example, basic rate taxpayers do not usually become liable for extra tax when they receive dividends from their investments.

However, a consumer may be liable to pay tax on an investment held outside an ISA if:

  • it pays interest distributions – and the consumer will be a taxpayer for some or all of the period that they hold it;
  • it pays dividends – and the consumer is liable for higher or additional rate tax for some or all of the period that they hold it; or
  • a profit is made when it is sold – and the consumer’s capital gains in that tax year are greater than their annual allowance.

Where we consider it likely that the consumer will have to pay tax on the returns from the investment, our approach depends on the individual circumstances of the case. But unless there is evidence to the contrary, we generally consider it reasonable to assume that:

  • any charges on holding the investment outside the ISA will not be significantly different from those that would have applied had it been held within an ISA;
  • the consumer will pay tax on the investment at the highest rate applicable to them;
  • the consumer’s tax position will remain unchanged for as long as they hold the investment;
  • the tax position of the investment will remain unchanged while the consumer holds it;
  • if the investment pays dividend distributions, it will return 7.5% each year (made up of 5% growth and 2.5% dividend);
  • if the investment pays interest distributions, it will return 6% each year (made up of 1% growth and 5% interest).

Consumers sometimes say that they will be liable for capital gains tax – when selling the investment that should have gone into an ISA. In these cases, we look at the consumer’s circumstances – including their investment history – to decide whether we agree this is likely. The amount of compensation we might tell the business to pay in these case would depend on:

  • how long the investment is likely to be held;
  • how much the investment is likely to grow in that time;
  • how the consumer has used their capital gains tax allowance in the past; and
  • the rate of tax the consumer is liable for.

cash-ISAs

Consumers who hold cash in an ISA do not have to pay tax on the interest. So if a contribution is missed, the potential loss is the tax they will have to pay on that interest outside the ISA.

The losses a consumer incurs – by missing an opportunity to invest in a cash-ISA – can usually be calculated by comparing the net interest rate earned by the funds outside the ISA with the gross rate achievable inside the ISA.

Subject to the individual financial circumstances of the consumer, we generally take the view that losses through missing a cash-ISA allowance will be for no more than five years. This reflects the fact that cash holdings are normally used to meet expenses first, rather than cashing in investments.

We also usually assume that during those five years:

  • the consumer’s tax status would not change;
  • ISAs would remain available – with the same benefits; and
  • it would be reasonable to expect a savings rate of 2.5% gross.

A consumer may sometimes limit their loss, by investing in a cash-ISA during a later tax year – using money they would not otherwise have used for this purpose. If it seems likely that the consumer would be able to replace the missed ISA in this way within five years, we will take this into account when working out the appropriate amount of compensation.

distress and inconvenience

We sometimes tell the financial business to pay the consumer compensation for the inconvenience and any distress caused – through missing out on their ISA allowance because of something the business did wrong.

help for businesses and consumer advisers

contact our technical advice desk on 020 7964 1400

This is part of our online technical resource which sets out our general approach to complaints about a wide range of financial products and issues. We would like your feedback on how helpful you found it. Please also use the feedback form below to tell us about anything you think we could clarify or explain better.

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  • The law requires us to decide each case on the basis of our existing powers and what is fair in the circumstances of that particular case.
    We take into account the law, regulators' rules and guidance, relevant codes and good industry practice at the relevant time.
    We do not have power to make rules for financial businesses.
    Our current approach may develop in the light of circumstances disclosed by further cases we receive.
    We may decide that fairness requires a different approach in a particular case.