Early ISA investing could leave you £25,000 better off, new research has revealed (Image: Getty)
Investors who act quickly this new tax year as of April 6 could significantly boost their long-term returns, according to new research from AJ Bell. The analysis shows that delaying contributions until the end of the tax year can come at a surprisingly high cost – even if you invest the exact same amount overall.
Dan Coatsworth, head of markets at AJ Bell, said making full use of your ISA allowance as early as possible is about more than just ticking off financial admin. “Acting swiftly to use your full ISA allowance as the new tax year begins could pay off big time. Putting it off until another day is a lost opportunity to make money,” he explained. “It’s not just about being organised with your life admin, it’s also about giving your ISA more time to work its magic.” AJ Bell’s various scenarios highlight a striking difference between proactive and non-proactive individuals.
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Investing earlier gives your money more exposure to growth (Image: Getty)
Early bird does catch the worm
“Early-Bird Erin”, who invested £5,000 at the start of each tax year since ISAs began in 1999, would now have built a pot worth £462,028.
By contrast, “Last-Minute Linda”, who waited until the last day of each tax year to invest the same amount, would have £437,035 – a difference of £24,993.
Markets naturally fluctuate, but historically they rise more than they fall. Since 1999, a typical global equity fund has delivered an average annual return of around 8% and risen in 17 out of 27 tax years. That means investing earlier gives your money more exposure to growth and more opportunity to benefit from compounding.
For those unable or unwilling to invest a lump sum, a monthly ‘drip feed’ strategy still performs well (Image: Getty)
The drip feed approach
For those unable or unwilling to invest a lump sum, a monthly “drip feed” strategy still performs well.
AJ Bell modelled “Drip-Feed Diana”, who contributed £416.67 per month, equivalent to £5,000 annually. Over the same period, this approach would have produced a portfolio worth £455,027. In a single year, that contribution adds up to the same £5,000 as lump sum payments – better than “Last-Minute Linda”, but not quite as good as “Early-Bird Erin”.
Drip feeding has its own advantages, Mr Coatsworth added: “While the early bird investor gets a head start over others, drip feeding money into an ISA can still be a rewarding strategy as you’re not trying to time the market. Over a long period, you will feed money into your account in both good and bad conditions.
“When markets are high, your money buys fewer shares or fund units – but when markets are low, you’ll get more bang for your buck. It’s also hassle-free and takes the emotion out of investing.”
On April 6, dividend tax rates increased by 2% (Image: Getty)
Increased dividend tax rates make ISAs even more attractive
Since April 6, investors holding assets outside a tax wrapper face:
- 10.75% dividend tax for basic rate taxpayers (up from 8.75%)
- 35.75% for higher rate taxpayers (up from 33.75%)
- 39.35% for additional rate taxpayers (unchanged)
By contrast, investments held within an ISA wrapper continue to be shielded from UK tax, meaning they remain completely free from dividend tax and capital gains tax.
“Making the most of an ISA also brings tax advantages compared to leaving money in a general investment account, which is particularly important now that dividend tax rates have gone up,” added Mr Coatsworth. “Putting money into an ISA locks in generous tax benefits so you pay nothing to the taxman on future income or gains.”