Savers and investors now have a clean ISA slate with the start of the new tax year, with a fresh £20,000 annual allowance available to use. 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.
Some investors really don’t waste any time – Fidelity once recorded that one of its customers once maxed out their new ISA allowance at 1:07am. Investing early in the tax year means you will have up to an additional year in the market. This can help power portfolios in a rising market, as more of your money is invested for longer. Here are four reasons why being an early bird investor might be right for you this tax year.
Minimise tax bills
Reductions to key allowances makes it even more sensible than ever to use as make the best of your ISA allowance – and as early as possible. The main rate of capital gains tax (CGT) has been raised from 10% to 18% for basic rate taxpayers and from 20% to 24% for higher and additional rate taxpayers, while the CGT annual allowance has dropped from £12,300 three years ago to just £3,000 now.
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. You will also avoid the tax usually charged on any dividends that would be applied on income-paying investments outside an ISA above the annual £500 limit per investor.
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 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, per year, 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 4,000 ISA millionaires in the UK.
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. With no crystal ball you decide which approach is right for your circumstances – and your personal investment strategy.
Photo by Zdeněk Macháček on Unsplash
