Avoid The Rush

Director of Coleridge Wealth Management, James Cridland standing in front of Clevedon Pier.

James Cridland, director of Coleridge Wealth Management. - Credit: Coleridge Wealth Management

Investing your ISA allowance early in the tax year can prove rewarding over the long term, says finance expert James Cridland, director of Clevedon-based company Coleridge Wealth Management. 

Some people have a habit of waiting until towards the end of the tax year (which is April 5) to use up as much of their ISA allowance as they can. However, by paying in as much as you are able to early in the tax year, you give your money a far better chance of working as hard as possible for you. 

Not only does this shield your investments from tax for a longer period of time, it also gives your money extra time to benefit from ‘compounding’. That’s when the money your ISA makes through growth and investment income is reinvested – and so that, too, has the chance to earn even more for you. 

For example, if you had invested your full ISA or PEP (the predecessor of the ISA) annual allowance every year since they were introduced (in 1987) early in each tax year, it would have been worth £1,100,932 at the end of the 2020/21 tax year (assuming the investments had followed the performance of the FTSE All-Share Index)1

However, if you’d waited until the end of each tax year to invest your full allowance, it would only have been worth £1,025,023. That’s a difference of £75,909, or almost seven per cent less than what it could have made.1 

What’s most important is to remember that investing is a long-term game; the longer you leave your money invested, the greater the chance of achieving better returns. Investing your ISA allowance at the start of the tax year gives your money the opportunity to grow for up to an extra 12 months. 

Of course, you are not guaranteed to do better by investing earlier, but by doing so you can get your money working harder for longer in two ways.  

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The sooner you use your ISA allowance, the greater the potential tax benefit because your investment is sheltered from Capital Gains Tax and Income Tax for longer. 

Similarly, your investment has more chance to benefit from compound interest – what Albert Einstein reportedly referred to as the ‘eighth wonder of the world’. Over the long term, the opportunity to make gains on the gains you have already made can make a big difference to your future wealth. 

Taking steps to minimise the impact of tax on your wealth should be a year-round activity, not something that we only think about in the last few weeks of the tax year. Whether through investing a lump sum or by setting up regular savings, making an early start with your ISA plans is one way to shelter more of your money from HMRC. 

To receive a complimentary guide covering wealth management, retirement planning or Inheritance Tax planning, contact Coleridge Wealth Management on 01275 430024 or email coleridgewm@sjpp.co.uk.  

1 Financial Express. Figures based on the performance of the FTSE All-Share Index and investment of the full general PEP and ISA allowances up to and including the 2020/21 tax year. Allowance for 2009/10 is based on that for investors aged under 50 at the end of the tax year. Values as at 05/04/2018. ‘Early investment’ is from the beginning of May at the start of the relevant tax year. ‘Late investment’ is the beginning of April at the end of the same tax year. Please note that you cannot invest directly in the FTSE All-Share Index.