Why it’s sensible to start using your ISA allowance as soon as possible
As we ticked over into the 2022/23 tax year on 6 April, that means your ISA allowance has reset once again.
Standing at £20,000 in 2022/23, you can use your ISA allowance to save and invest in a range of tax-efficient accounts, all keeping your money shielded from Income Tax and Capital Gains Tax (CGT).
But did you know that it may be sensible to use your ISA allowance sooner rather than later in the tax year?
Read more to find out why.
Early investing could provide better returns – and ensures you don’t forget to use your allowance
The most compelling reason for contributing to your ISA at the start of the tax year is because this has historically provided better returns.
Research carried out by fund supermarket Hargreaves Lansdown presents an interesting example of how this works.
This research analysed the returns of someone investing £5,000 into a Stocks and Shares ISA each tax year since the accounts launched in April 1999 up to March 2022.
They then looked at two different scenarios: what happens when you invest that £5,000 on the first day of each tax year (i.e., 6 April), versus the last day (i.e., 5 April).
By the end of March 2022, the ISA investing on the last day of each tax year was worth a total of £249,381. Meanwhile, the ISA investing on the first day of the month was worth £259,625 – a difference of more than £10,000.
While both ISAs performed fairly well over the period and £10,000 may not sound like a big difference, it’s an additional sum that could have been earned by simply investing at the start of the tax year rather than the end.
Returns aside, making the most of your ISA allowance can also help to make sure that you won’t forget to do it later.
You may think that you’ll remember to make use of your ISA allowance before next April – you’ve got a whole year to do so, after all.
Even so, you can remove the potential to forget entirely by saving and investing your money as soon as possible.
What kind of ISA is right for you?
While past performance is not an indicator of future performance, the Hargreaves Lansdown figures show that it may still be sensible to make use of your allowance as soon as possible.
There are many different ISAs available that you could use your ISA allowance on, each with different features. Common options include:
- Cash ISAs – hold your money in cash, with any interest generated free from Income Tax.
- Stocks and Shares ISAs – invest in a range of assets within the ISA wrapper. Any returns your investments generate are free from CGT.
- Innovative Finance ISAs – peer-to-peer lend your money to individuals and businesses looking to borrow. These more complex accounts are typically only suitable for experienced investors.
- Lifetime ISAs (LISAs) – designed specifically for 18- to 39-year-olds looking to buy a first home or make an early start on retirement savings. You can open either a Cash or Stocks and Shares LISA and you’ll receive a 25% government bonus on contributions up to the annual limit of £4,000. This £4,000 does count towards your overall ISA allowance.
As you can see, there are a range of different ISAs that could help you on the road to your financial goals.
A Cash ISA could be a great option if you’d prefer not to invest your money, but still want to save without having to worry about tax.
On the other hand, Stocks and Shares ISAs can potentially provide returns that exceed what you can achieve with a Cash ISA. This could make them a more suitable option for you, depending on your targets for the future.
In fact, this is supported by figures published in the Independent collected by data provider Moneyfacts.
This research assessed the average ISA’s performance between February 2021 and February 2022.
They found that the typical Cash ISA rate was just 0.51%, while the average Stocks and Shares ISA returned 6.9%. That means returns for a Stocks and Shares ISA were 13 times greater than the average Cash ISA.
So, if you’re willing to take on the additional risk of investing your money in the stock market, you may be able to achieve greater returns with a Stocks and Shares ISA.
Of course, you’re free to divide your allowance across accounts to get the best of both worlds.
Make sure your family use their allowances too
Every individual in the UK has an ISA allowance. That means, if you have a spouse or partner, you can tax-efficiently save and invest up to £40,000 between you each tax year.
Additionally, you could also make use of the Junior ISA (JISA) allowance if you have children.
The JISA allowance in the 2022/23 tax year is £9,000, and you can save up to this amount in a Cash JISA, invest in a Stocks and Shares JISA, or spread it across the two as you see fit.
Your child can then take control of the account aged 16 and access the funds in it when they turn 18.
This could allow you to tax-efficiently save and invest an additional £9,000 on top of your own ISA allowance. It could simultaneously set your child up with a savings pot that could help them to achieve financial freedom in the future.
Get in touch
If you’d like to find out how we use ISAs to help you achieve your financial goals, please get in touch with us at Britannic Place.
We design and implement financial plans around your life goals, and ISAs can be a useful, tax-efficient way to help you reach your targets.
Email firstname.lastname@example.org or call 01905 419890 to learn more about the investment strategy we design for you.
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.
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.