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Why you should be an ‘early bird’ ISA investor

Why you should be an ‘early bird’ ISA investor
Emma Lunn
Written By:
Emma Lunn

Using your full ISA allowance right away is the key to achieving above average ISA returns, according to experts.

People who invest their full ISA allowance at the start of the tax year (6 April) benefit from an extra year of investment; when compounded over the years, this makes a massive difference to returns.

Analysts at AJ Bell worked out that savers who put £5,000 into an ISA at the beginning of each tax year since 1999, instead of at the end, would now be more than £19,000 better off, despite saving exactly the same amount.

The 2023-24 tax year has been positive for the stock market, with a global fund returning 17.6% since 6 April 2023, according to Morningstar. This means a £20,000 ISA investment into a global fund made by an early bird at the beginning of this tax year is already worth £23,520 by the time last-minute ISA investors transfer money into their ISA.

Laith Khalaf, head of investment analysis at AJ Bell, said: “Early birds might not always get this lucky. But even if you happen to invest at a dreadful time, in the long term you can still expect to come up smelling of roses if you put money to work in the market sooner rather than later.

“Early bird ISA investors in April 2008 would have had to watch their investment plummet by 23% over 12 months as the financial crisis rocked the global stock market. But even so, by following the same strategy each year, early birds starting their investment plan in 2008 would now be £13,585 ahead of comparable last-minute ISA investors.”

AJ Bell analysed the returns of DIY investors using the AJ Bell platform. It noted that, in the past two years, 36% of early bird ISA investors used all their £20,000 ISA allowance in April. It said this suggests there is a significant cohort of investors who have cash or investments that they want to transfer into a tax shelter as soon as possible.

Khalaf added: “Doing so at the beginning rather than at the end of the tax year means protecting your investments from dividend and capital gains tax for an extra 12 months. Hence why these early bird ISA investors are keen as mustard to use their allowance as soon as the new tax year rolls around.

“The early bird tax advantage could be especially valuable this year seeing as the dividend allowance is being cut to £500. If you’re already using the £500 allowance elsewhere, a £20,000 early bird contribution invested in a portfolio yielding 4% would save a higher-rate taxpayer £270 in dividend tax compared to a last-minute ISA investor holding the same portfolio outside the tax shelter until the end of the year.

“Of course, many people leave their ISA contribution to the end of the tax year as they don’t have the money available right away or are waiting until the last minute to see how much they can afford to stash in the tax shelter. It still makes sense in these circumstances to use the tax shelter as soon as possible, because when the new tax year rolls around, the old allowance is gone for good.”

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