Many of us put off using our ISA allowance until the end of the tax year, but investing at the beginning of the tax year could increase your returns over time.
You can shelter up to £20,000 from tax in ISAs in the 2023/24 tax year, which started on 6 April, and there are several reasons to make use of some of all of this allowance sooner rather than later. If you want to save over the long term, and are comfortable accepting the risks involved, a stocks and shares ISA can be a good place to start, and the earlier you start investing, the longer your investments have to potentially grow in value.
However, that’s not the only reason getting started earlier can be a good idea. Here’s our rundown of some of the reasons you might want to use your ISA allowance early on in the tax year.
1. You can maximise the tax benefits of ISAs
You won’t pay any income tax or Capital Gains Tax (CGT) on gains in an ISA. Find out more about Capital Gains Tax tax in our article What is Capital Gains Tax and how do I pay it?
You also won’t pay tax on dividend income received on your ISA investments, which is good news given that the dividend allowance, which is the amount you can receive tax-free in dividend income outside an ISA or pension, has just reduced from £2,000 to £1,000. The dividend allowance will fall to £500 from April 2024, making ISAs an increasingly attractive option for any long-term savings. Read more in our article How are dividends taxed?
2. You’ll potentially increase your long-term returns
If you have some money to spare, using some or all of your ISA allowance at the start of a new tax year by investing in a stocks and shares ISA could potentially increase your long-term returns, as your investments will have longer to grow. Over the decades, shares have historically produced greater returns than cash. There’s no guarantee that this trend will continue, of course, but given enough time your investments have more chance of growing into a substantial pot.
You can usually choose from several ready-made investment options that suit different levels of risks on an investment platform. This makes it easy to find a suitable home for your ISA investments, without having to choose funds yourself. If you’re unsure about your approach to risk, read our article What’s your attitude to risk?
By starting to invest early in the tax year, your investments have more time to benefit from the magic of compounding, too. Essentially, this is when your investment returns earn returns on top, a bit like a snowball rolling down a hill. This can make an enormous difference to your returns over time, and explains why the sooner you start investing, the better. Bear in mind, though, that investing always carries some risk, so there’s a chance you may get back less than you initially invested. Find out more in our guide Is investing right for you?
3. You’ll avoid a last minute rush
Your annual ISA allowance is a ‘use it or lose it’ allowance, so you cannot carry any of it into the next tax year if you don’t make use of it. If you’re able to make use of your allowance at the start of a new tax year, this ensures you’ve done this valuable piece of tax-efficient planning ahead of time. This way, you may avoid a last-minute rush to invest before your current year’s allowance expires on 5 April.
4. You’ll have longer to drip feed money into your ISA
Few of us have £20,000 to spare to make use of our full ISA allowance at the start of the tax year, particularly when living costs are soaring. However, if you’re able to drip-feed money into your ISA on a monthly basis, doing so sooner rather than later will give you a head start on investment growth that tax year.
By saving regularly, you’ll also benefit from something called ‘pound-cost averaging’. Essentially, when stocks and shares fall in value, your money buys more shares or investment units, and when they rise, you buy fewer. In theory, you benefit from buying your investments at their average price over an extended period. Read more in our article The benefits of saving regularly into a stocks and shares ISA.
Regular investing is also usually very simple to set up. Most stocks and shares ISA providers enable you to set up a monthly direct debit from your current account into your ISA, and you can usually choose from a number of different investment options.
5. You’ll build good investing habits
By saving regularly into a stocks and shares ISA at the start of a new tax year, you’re developing good investment habits. Hopefully, these can be sustained over time, and can help give you a headstart in building your investment pot. You’ll still benefit from compounding even if you’re only investing a little each month, and this can help you to focus on your long-term goals.
If you’re looking to invest in an ISA, fund platforms such as Fidelity, Hargreaves Lansdown and AJ Bell can help narrow down your choices with recommended fund lists, which might highlight 50 funds out of the 3,000 plus available to UK savers. They also offer ready-made funds for a range of different risk profiles if you don’t want to pick investments yourself. Bear in mind that there are charges associated with stocks and shares ISAs and you’ll pay a fee to the platform as well as for the funds held.