Why investing in an ISA at the end of the tax year could be damaging to your wealth

According to The Times, figures from HM Revenue and Customs (HMRC) revealed that there were nearly 12 million ISA accounts in operation with a total value of £742 billion in 2021/22.

While ISAs are popular, many account holders wait until the end of the tax year to place money into them. If you’re one of them, you may not realise that doing this could significantly reduce your wealth’s growth potential over the long-term.

Read on to discover more, and why placing money into your ISA at the start of the tax year is likely to be a much shrewder financial strategy. Before you do though, let’s look at ISAs more closely.

ISAs could help to boost your money’s growth potential

Normally, when you place money into an ISA, any growth it makes is not liable to Capital Gains Tax (CGT). Furthermore, any money withdrawn from an ISA will not typically be exposed to Dividend Tax or Income Tax, although they can be liable to Inheritance Tax when the account holder dies.

As ISAs are CGT-free, they could boost the growth potential of your savings or investments, as any gains made are not reduced by the tax. This could be particularly important after the government reduced the CGT allowance, which is the amount of gains you can make without becoming liable to the tax.

In 2023/24, it was slashed from £12,300 to £6,000, and it drops to £3,000 in April 2024. Any gain that’s over the allowance could be taxed at between 10% and 28%, depending on the type of asset involved and your marginal tax rate. With this in mind, making the most of ISAs is usually a good financial plan.

The rules around placing money into ISAs changes in 2024/25

There are five different types of ISAs, which are: 

  • Cash ISAs
  • Stocks and Shares ISAs
  • Lifetime ISAs
  •  Innovative Finance ISAs
  •  Junior ISAs.

In 2023/24, you can invest up to £20,000 into an ISA, or split the amount over different ISAs as long as you don’t exceed this amount. You can also invest up to £9,000 into a Junior ISA (JISA).

While you can’t currently pay into more than one ISA of the same type, this changes from April 2024, as you’ll be able to hold multiple ISAs of the same type after this date.

Placing money into ISAs at the end of a tax year could reduce growth

If you have an ISA, waiting until the tax-year end to invest could significantly reduce its growth potential over the long-term. This is particularly true with a Stocks and Shares ISA as your money won’t be exposed to the markets for much of the tax year, which could significantly reduce its future value.

To demonstrate this you might want to consider an article published by This is Money. It suggests that investors who placed £3,000 into certain Stocks and Shares ISAs on the first day of the tax year between 1999 and Q1 of 2023 were more than £9,000 better off than those who invested on the last day of each tax year.

While the illustration highlights that investing at the start of the tax year may provide greater growth potential, please remember that previous returns is no guarantee of future performance.

A Stocks and Shares ISA could boost your wealth

Historically, the stock market has tended to outperform cash savings over the long-term, something highlighted in another This is Money article. It points to the 2023 Barclays Equity Gilt Study, which tracked the nominal performance of £100 invested in cash, bonds or shares between 1899 and 2022.

It found that during the 20 years leading up to 2022, shares delivered a real average annual return of 2.9%, while cash returned -1.1%. In addition to this, if you held shares for five consecutive years during the period, they would have outperformed cash in 90 of the 124-years.

As you can see, placing your money into a Stocks and Shares ISAs may be a more attractive option than a Cash ISA, and something you want to consider. That said, always bear in mind that the value of your investments could fall, and you may get back less than you originally invested.  

A financial adviser could help you to identify the best Stocks and Shares ISA for you and ensure its in line with your appetite for risk. This could help you to maximise the growth of your money, while enjoying the peace of mind that it’s exposed to a level of risk you’re comfortable with.

Get in touch

If you would like to invest in ISAs in 2024 and would like to discuss how doing so earlier in the year might benefit you, please give us a call. We’d be happy to explain how it may be able to boost your wealth and whether it’s the right option for you.

You can speak to one of our advisers or call us on 01527 577775 as we’d be happy to help.


Thursday 15 February 2024