With the start of the tax year on 6 April, a fresh £20,000 ISA allowance is available. 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 once recorded that one of its customers once maxed out their new ISA allowance at 1:07am.
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 to only £500 from April, and the Capital Gains Tax allowance slashed from £6,000 to £3,000 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 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.
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