Be an early bird ISA investor


With the start of the tax year, a fresh £20,000 ISA allowance is now on offer. Many last-minute investors who rushed to complete their ISA applications to beat the end of tax year deadline might have resolved to be more organised in the future. After all, many experts believe that it’s the early birds that can arguably catch the best tax breaks.

Investing early in the tax year it means you will have up to an additional year in the market, which will also help power portfolios in a rising market, as more of your money is invested for longer. Some investors really don’t waste any time – Fidelity recorded that one of its customers once maxed out their ISA allowance within 90 minutes of the new tax year at 1:07am.

Another ISA platform, interactive investor, reported that investing early is a key strategy for many of its ISA millionaires. Some 45% of total 12-month subscriptions from its ISA millionaires were added between 6 and 30 April 2022. And across all of its ISA holders, 27% of the total 12-month subscriptions were deposited between 6 and 30 April 2022.

Here are 4 reasons why being an early bird investor might be right for you this tax year.

Minimise tax bills

As key allowances have halved overnight, it might be even more sensible than ever to use an ISA allowance – and as early as possible. The dividend allowance has been cut from £2,000 to £1,000 from April, and the Capital Gains Tax allowance slashed from £12,300 to £6,000 too.

By owning – and even moving – investments into an ISA sooner rather than later you can minimise the amount of tax you pay. It will give you the freedom to sell what you want when it makes the most sense for your finances, without thinking about capital gains tax. And dividends are tax-free in an ISA too.

Benefit from the magic of compounding

The sooner you start investing, the sooner your money can – hopefully – grow. Your wealth can receive a boost from returns on returns known as compound growth. Put simply, your money earns a return in the first year, in the second year and both the original investment and the return benefit from any growth in the second year. In the third year your investment is further enhanced by any returns achieved. This snowball effect is called compound growth.

No limits on growth

While the amount you can invest in an ISA tax-free is limited to £20,000 per person, there’s no limit to how much the value of your investment ISA can grow. By taking full advantage of the ISA tax shelter, there’s potential to grow a savings pot worth hundreds of thousands of pounds – or even hit the £1 million mark. According to HMRC, at the last count there were over 2,000 ISA millionaires in the UK. The top 60 have ISAs worth an average £6.2 million.

Embrace being a disciplined investor

Starting early isn’t just for those lucky enough to have a lump sum to invest. You can seize the opportunity to set up regular monthly payments into an ISA each month. There’s no hard and fast rule about which is better.

Calculations by interactive investor show that a regular monthly investment of £50 in a fund replicating the performance of the FTSE World over the year to 31 March 2023, (excluding charges), would have generated a total return of £617 on a total contribution of £600. Whereas a lump sum investment of £600 over the same time frame would have shrunk a little, returning £596 by the end of March.

Over longer periods, lump sum investing was the more lucrative strategy. Again, looking the performance of the FTSE World, the lump sum investment of £1,800 would have turned into £2,874 over three years, compare to £2,035 if the lump sum was split equally into monthly investments (£50 per month instalments).

Over five years, a £3,000 lump sum investment would have grown into £5,003 compared to £3,809 under the regular investing strategy – the equivalent amount drip fed in £50 per month instalments. Over 10 years, a lump sum investment of £6,000 would have produced a total return of £17,436, versus £10,625 if the equivalent amount was drip fed in the market in £50 per month regular instalments.

With no crystal ball you can take your chance with whatever is right for your circumstances – and your personal investment strategy.

Photo by Fatih Turan on Pexels