Investing through an individual savings account (ISA) is a relatively simple way of shielding your money from tax.

But there are a few misconceptions around how ISAs work, how many you can pay into and who they’re aimed at. 

To help improve your understanding of ISAs, we’ve debunked four of the most common ISA myths.

Myth 1: You can only pay into one ISA each tax year

A common misconception is that you can only open and pay into one ISA each tax year. In fact, you’ve always been allowed to pay into different types of ISAs, including stocks and shares ISAs and cash ISAs, in the same tax year.

The confusion probably stems from the fact that, up until recently, you could only pay into one of the same type of ISA each tax year – i.e., one stocks and shares ISA and/or one cash ISA. This rule was abolished on 6 April 2024, which means you can now contribute to multiple ISAs as you see fit. An exception to this is lifetime ISAs – you can only pay into one lifetime ISA each tax year¹.

The main thing to remember is that the annual ISA allowance – which is currently £20,000 – applies across all your ISAs. If you’re contributing to several ISAs, make sure you keep a close eye on your contributions so that you don’t accidentally exceed the limit.

Myth 2: Stocks and shares ISAs are only for experienced investors

If you haven’t invested before, the idea of a stocks and shares ISA might feel intimidating. But you don’t need to be a seasoned city trader to start investing.

At Vanguard, for example, we offer several investment options to suit different people’s needs, preferences and levels of knowledge. You can do it yourself by choosing from our wide range of low-cost individual funds. Or you can keep things simple by picking one of our five LifeStrategy funds, which mix bonds² and shares to balance risk and reward.

If you want more of a helping hand, our managed service selects investments based on your attitude to risk. We start by asking you a few questions to understand how you feel about risk and then use those answers to match you with one of five portfolios.

Myth 3: Switching providers isn’t worth the hassle

Transferring your ISA to a different provider could mean you benefit from lower fees. But you might be wondering whether it’s worth the hassle. After all, can a 0.5% fee really be that much better than a 2% fee?

It might not seem like a huge difference, but over time costs can add up and eat into your investment returns. Take a look at the chart below, which assumes an annual £20,000 ISA investment with a 5.5% annual return for both scenarios. The light green line depicts a low-cost provider with fees of 0.5% a year, so a net return of 5%. The dark green line depicts a higher-cost provider with fees of 2% a year, so a net return of 3.5%.

After 25 years, someone who invests with the low-cost provider would be sitting on an investment portfolio worth £1,023,052. That reduces to £778,997 for the higher-cost provider – a difference of nearly £250,000!

By minimising your costs early on – perhaps by investing through a low-cost Vanguard ISA – you could reach your financial goals faster.

The difference fees can make to investment returns

Notes: This hypothetical scenario is for illustrative purposes only and doesn’t represent a particular investment or its expected returns. It assumes annual returns of 5.5%. Balances reflect the value at the end of each period.

Source: Vanguard calculations.

Myth 4: Diversification means having ISAs with different providers

You’ve probably read that it’s important to diversify your investments, but that doesn’t mean simply opening lots of ISAs with different providers.

Diversification is when you spread your money across different types of investments – such as shares and bonds – as well as different regions of the world and sectors of the economy. The idea is that when one type of investment, region or sector underperforms, the others will hopefully outperform. This can help to cushion the impact of losses in your portfolio and lead to smoother overall returns.

If you have ISAs with several providers, you could find you’re doubling up on the same investments. It can also be harder to manage your investments and understand whether you’re on track to realise your goals. Bringing your various pots together can make it easier to keep track of everything and may be cheaper too.

One thing to bear in mind is there’s an £85,000 cap on the amount of compensation you’re entitled to in the unlikely event that your ISA provider goes bust³. If you have more than £85,000, you might want to consider splitting it between separate providers.
 

¹ These rules do not apply to junior ISAs. A child can only have one cash junior ISA and one stocks and shares junior ISA at any one time

² Bonds are a type of loan issued by governments or companies, which typically pay a fixed amount of interest and return the capital at the end of the term.

³ The Financial Services Compensation Scheme (FSCS) protects your money if the firm is authorised by the Prudential Regulation Authority or the Financial Conduct Authority and your investment is a regulated product. The FSCS provides compensation of up to £85,000 per person, per firm.