Isa savers could get £9k extra and it won’t cost them a penny – but…

Victoria Scholar talks tax-free ISAs

One of the odd things about the annual £20,000 tax-free Isa allowance is that the moment it expires, we all get a brand new one very next day.

The Isa allowance is issued on a “use it or lose it” basis, so last week saw the usual rush to beat the annual April 5 deadline.

Once cash Isa and stocks and shares Isa savers have scrambled to secure their allowance, the last thing they want to do is start worrying how to invest their new one. Most won’t have the money, anyway.

Yet that’s exactly what they should do, if they possibly can.

The temptation is to sit back and do nothing until March or April next year, but it can prove a costly mistake.

New figures show that so-called early-bird Isa investors typically make more money than those who leave it to the end.

Someone who has invested £3,000 a year in shares on the first day of the tax year since Isas were launched in 1999 would have £9,271 more than those who waited until the last minute, according to new research from AJ Bell.

Both would have contributed £72,000 in total but the early bird investor would have £200,373, against £191,102 for last-minute investors.

These figures assume that both invested in the same global equity fund, said Laith Khalaf, head of investment analysis at AJ Bell. “The £9,271 difference is purely due to timing, and it’s quite startling.”

Khalaf said early-bird investors tend to do better for the simple reason that their money is invested in the market for longer. “It has more time to compound grow and better still, is also protected from HMRC at the outset.”

Stocks and shares Isa investors have another reason to get in early this year, as from Thursday Chancellor Jeremy Hunt slashed the annual dividend allowance.

This previously allowed investors to earn £2,000 worth of dividends from shares in funds held outside of an Isa each year, without paying tax on the money.

It has now been halved to £1,000, and will halve again to £500 from April next year. Yet there is no income tax on dividends generated inside an Isa.

Similarly, Hunt has just slashed the capital gains tax (CGT) threshold from £12,300 to just £6,000, and will cut it again to £3,000 from April 6, 2024.

Again, there is no CGT to pay on capital gains from growth on shares or funds held inside an Isa, Khalaf said. “It makes sense to wrap investments in a tax shelter sooner rather than later.”

For those who don’t have a penny to put into an Isa today, Khalaf suggested setting up a regular monthly Isa savings plan. “That way at least some of your money gets into the market, and the regular nature of your investment also makes for a smoother ride amid today’s volatile markets.”

Sarah Coles, head of personal finance at Hargreaves Lansdown, reports a rush of Isa “double dippers” either side of the new tax year.

“April is our biggest month and there’s an annual race to get in just before the end of one tax year, and at the start of the new one.”

Coles reports a large increase in early bird regular monthly investors. “Investing automatically every month also means you do not need to worry about timing the market.”

By drip feeding your money into a stocks and shares Isa, you also take advantage of market falls, as your monthly sum buys more stock or investment fund units. “You benefit when markets recover, as history shows they always do given time,” she added.

Those who reinvest their dividends back into their portfolio also benefit from temporary stock market dips, in the same way.

Coles said you don’t have to be rich to invest this way. “You can set up regular payments of as little as £25 a month, giving yourself the best possible chance of building as big a nest egg as you can afford by the end of the tax year.”

Investors who take this approach can also pay in lump sums on top, whenever they have money to hand, said Victoria Scholar, head of investment at Interactive Investor.

A combination of early bird lump sums and regular monthly investing could mean that when the next Isa season draws to a close in April 2024, you may not face such a mad scramble to use it.

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