Since their launch in 1999, Individual Savings Accounts (ISAs) have become one of the most popular ways to save money. According to the latest government figures, around 13 million adult ISA accounts were subscribed to in 2019/20 alone, with an estimated value of £75 billion.
It’s perhaps not surprising when you consider the tax advantages offered by ISAs. Any amount you draw from your ISA will not be liable to Income Tax, and any growth it enjoys will be free from Capital Gains Tax.
While 75% of ISAs opened in 2019/20 were cash, rising inflation has the potential to reduce the value of these ISAs in real terms. To discover why the increasing cost of living could lower the value of your cash savings in real terms, read our blog.
If you already have a Stocks and Shares ISA to help inflation-proof your wealth, you may not be aware of a small but powerful tip that could boost its long-term growth potential. As we head towards the new tax year, read on to discover what this is, and how it could boost your ISA’s growth potential.
The end of the tax year is when many invest in a Stocks and Shares ISA
There’s a reason March is known as “ISA season” among financial planners. It’s when many of those who hold Stocks and Shares ISAs invest their money, eager to use up the generous ISA allowance before losing it when the next tax year begins on 6 April.
This is echoed by Investors’ Chronicle, which reported that investment platforms typically see a last-minute rush of people eager to invest in ISAs. The article reveals data from interactive investor that shows 20% of all the ISA money it received in 2019/20 came in during the last month of the tax year.
If you hold a Stocks and Shares ISA and typically invest at the end of the tax year, you’re clearly not alone. What you may not realise is that doing so could significantly reduce the growth of your tax-efficient investment over the long-term.
Let’s now look at this in more detail.
Investing at the beginning of the tax year increases growth potential
In the 2021/22 tax year, you can contribute up to £20,000 a year into an ISA, which can be put into a cash or stocks and shares account, or split between the two. The limit will remain the same in the 2022/23 tax year, and you can place up to £9,000 into Junior ISAs (JISA) in both tax years.
If you invest these amounts into a Stocks and Shares ISA at start of the tax year, the money will be exposed to potential growth for longer – potentially, 12 months longer. This could result in more growth potential and a significant increase in returns over the long term.
This is echoed by another Investors’ Chronicle article that makes for interesting reading. It uses data from the MSCI World Index to show that if you had invested £20,000 at the beginning of the tax year for the 10 years leading up to April 2021, your investment could have grown to £356,353.
The MSCI World Index tracks the performance of a basket of companies in developed nations.
Compare this to the £329,316 your investment would have been worth if you’d invested at the end of each tax year, and you can see that investing early increased growth by £27,037.
It should be noted that the calculations are for illustrative purposes only, so don’t consider the effects of charges on any investment. For ease, it also assumes £20,000 was put into the ISA every year despite the ISA allowance being below this amount in some years.
While the illustration is basic, it still highlights that investing at the beginning of the tax year can be a shrewd financial strategy.
Investing early in the tax year also reduces stress
While the additional growth potential is a sound reason to invest at the beginning of the tax year, it’s not the only one. Doing so could also reduce the stress of trying to ensure the investment is made before losing your annual ISA allowance.
With many other people also trying to invest their Stocks and Shares ISA before the 5 April deadline, you may not get it done in time. As a result, you could miss out on £20,000 of tax-efficient investment.
By investing early in the year, you eliminate the risk of this happening.
Get in touch
As we head towards the 2022/23 tax year, if you would like to discuss investing into a Stocks and Shares ISA at the beginning of the tax year, please contact us at hello@ardentuk.com or call 01904 655 330.
As award-winning specialists in financial planning, we work with you to create a financial strategy that helps you meet your long-term goals and provides peace of mind.
Please note
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
