In the world of finance, February and March are busy months, largely because many of those who hold a Stocks and Shares ISA place money into them at this time of the year. More often than not, this rush to invest is driven by a desire to use the ISA allowance before it’s lost.
As the allowance, which is £20,000 in 2024/25, cannot be rolled over to the next tax year, if you don’t use it before the start of the new tax year on 6 April, you lose it. Little surprise then, that March is dubbed ‘ISA season’ by those in the financial sector.
While investing at the end of the tax year means you can use your allowance and place a substantial amount of money into your ISA, waiting until March could actually be detrimental to your wealth. Read on to discover more, and three reasons why investing at the start of the tax year is normally a much savvier financial strategy.
1. It could increase your investment’s growth potential
Investing early means your money could be exposed to growth potential for longer. In fact, if you usually invest at the end of the tax year, doing it at the very start of it could result in your money enjoying a whole year’s worth of extra growth potential.
To demonstrate the potential benefits this could provide, you might want to consider the following example. According to This is Money in April 2024, if someone invested their full ISA allowance in a global tracker on the first day of the tax year in each of the previous 10 years, it could be worth £360,500.
If, on the other hand, they left it to the last day of the tax year, it would be worth £322,500 – a fall of £38,000!
Please note that the calculations were for illustrative purposes only and assumed that £20,000 was placed into the Stocks and Shares ISA every year, despite the allowance being lower in some years.
Furthermore, the illustration didn’t consider the effects of any charges or the impact of inflation on the investment’s real-term value.
The fund the money was placed into had an ongoing charge of 0.11%, and tracked global markets except for the UK . Please remember that past performance is no guarantee of future performance, and you may get less back than you originally invested.
2. Investing earlier in the tax year helps to reduces stress
As the end of the tax year is when many ISA holders look to invest, it can create a bottleneck of applications with providers. In the worst-case scenario, this might result in you missing the deadline and losing your £20,000 allowance.
By investing earlier in the tax year, you can enjoy peace of mind that you have plenty of time to invest your money, ensuring the deadline will not be missed.
3. You could have more tax-free cash to enjoy
As you can see, investing at the start of the tax year could significantly increase your money’s growth potential. If you invest into a Stocks and Shares ISA, the increased growth potential could be even greater as the accounts are typically free of Capital Gains Tax (CGT).
This in turn could help to amplify the potential value of your ISA.
CGT is charged on any gain that you make on certain assets, including second properties and specific types of investments. While the CGT allowance means that you can make a limited amount of gains before the tax is charged, this has plummeted from £12,300 in 2022/23 to £3,000 in 2024/25.
Any gains made above £3,000 could be taxed at 10% or 24%, depending on the asset and your marginal tax rate. As any growth made within an ISA is CGT-free, any growth that exceeds the allowance will not be subject to the charge, providing you with more tax-efficient money to enjoy.
As such, investing early to enhance your Stocks and Shares ISA’s growth potential could be a very shrewd financial move.
Remember, investing early in the tax year could also boost your retirement lifestyle
It’s not only Stocks and Shares ISAs that benefit from tax-efficient growth potential. Defined contribution pensions (DC) are also exempt from Capital Gains Tax (CGT) on any growth they make.
As these retirement plans – otherwise known as a money purchase pension schemes – invest in a range of assets including stocks and shares, the earlier you place money into them the more tax-free growth potential it’s exposed to.
This could boost the value of your pension pot, which could help to provide you with a better standard of living when you retire.
Get in touch
If you have a Stocks and Shares ISA, or are considering opening one, and would like to discuss the advantages of placing money into it earlier in the tax year, we’d be happy to help. Either speak to one of our advisers or call us on 01527 577775.