Avoid the Last Minute Rush To Use ISA Tax-Free Allowance

You might think you’re a savvy investor if you use your full tax-free ISA allowance each year – and here at UK Investor we’d certainly agree that’s good practice – but you could be surprised by how much your total returns depend on when in the year you invest.

Fidelity carried out some research to determine how much different the value of an ISA fund might be after ten years, based on three different investment schedules.

These include:

  • Using your full ISA allowance on the last day of the tax year.
  • Using your full ISA allowance with equal monthly deposits over the full year.
  • Using your full ISA allowance on the first day of the new tax year.

In every instance, the hypothetical investor has deposited the full tax-free amount permitted into their ISA by the time the tax year ends on April 5th.

Working it out

It’s important to know what Fidelity’s figures are based on. In this case, the calculations were made in April 2019, based on the FTSE All Share Index, and assuming the investors had used their full total ISA allowance of £136,360 since the 2009-10 financial year.

For obvious reasons, investing earlier in the year yields the greatest returns, as the funds you deposit earn interest over the course of that same year, which is then compounded year-on-year by future returns too.

But just how much difference does that make on an ISA over the course of a decade?

Early investments reap returns

Fidelity’s figures found that as of April 2019, the three strategies outlined above would have generated an ISA fund worth in total:

  • £179,611 (waiting until April 5th to invest in full)
  • £192,500 (making monthly deposits starting April 6th)
  • £199,832 (depositing the full amount on April 6th)

That’s a difference of £20,221 by depositing on the first day of the tax year rather than the last day – and a still healthy £12,889 gain just by spreading your deposits over a monthly basis.

What do investors really do?

The reality is that some investors are savvier than others. Fidelity reported that they received a deposit into a Junior ISA at 11:59pm on April 5th and the first ISA deposit of the new tax year at 12:01am on April 6th.

One client had used their full ISA allowance by 9:50am on April 6th 2019 – a good level of commitment to savvy investing, especially for a Saturday morning.

Take-home messages

There are three important messages to remember here:

  1. Investing the full amount as early as possible in the new tax year will generate the largest return over the long-term.
  2. Spreading your deposits on a monthly basis can still have a significant impact, generating nearly 64% as much additional value.
  3. It still makes sense to use any remaining allowance at the end of the tax year, to leave your full allowance for the following year.

Finally, remember that stocks and shares ISAs can lose value as well as gain it, so at UK Investor we would always recommend you stay aware of your risk and maintain a diverse investment portfolio to maximise your chances of long-term gains.


Disclaimer: The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.