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Fresh into the new tax year, now is the time to start investing if you can afford to start taking advantage of your £20,000 ISA allowance and give yourself the best chance of maximising potential returns.  

Our analysis shows that it may be beneficial to start taking advantage of your annual ISA allowance as early in the new tax year as possible. This can be either through contributing regularly or investing the whole £20,000 as a lump sum if you can afford to.

Many of us may have just invested ahead of 5th of April to take advantage of our 2023/24 allowance. However, if you can afford to invest again, there could be good reason to invest fresh into the new 2024/25 tax year. 

Money held within a tax wrapper is free from tax on growth, returns and interest. However, please note that as with all investing, returns are not guaranteed and you may get back less than you invest. 

The benefits of compounding

The earlier in the tax year you start putting money away, the earlier you may start to benefit from compounding, and the tax-efficient investment returns can potentially mount up year-on-year.

As we discuss in our Investor Essentials blog on the topic, in basic terms, compounding means you could potentially earn returns on not just your initial investment, but also on any accumulated returns you may achieve over time. It’s less about how much you can afford to invest straight away, and more about for how long the money has to potentially grow.

Invest early and reap the rewards  

Since the ISA was first introduced in April 1999, UK savers and investors have been able to help their money go a little further with an annual allowance that doesn’t require you to pay income, dividend or capital gains tax on growth or returns.   

When the ISA was originally introduced in 1999, the allowance was much lower than it is today. The maximum ISA allowance was £7,000. You could invest all of this in a stocks and shares ISA, but the most you could save in a cash ISA was just £3,000.  

Our calculations show that if you’d contributed £6,000 to a simulated medium-risk stocks and shares ISA on the first day of each tax year from 6th April 1999 to 6th April 2022, you could have accrued £14,514 more than if you had waited until the last day of the tax year, so 5th April 2000 to 5th April 2023. Our calculations are based on performance as of 22nd February 2024. 

That’s an additional return of over 9%, a sizeable difference that could have seen early birds achieve their goals faster than latecomers. However, remember these figures and the other figures we include below refer to simulated past performance, which is not a reliable indicator of future performance. Also, these calculations do not take into account the impact of inflation.  

Total value of a simulated stocks and shares ISA after investing £6,000 per year since 1999

Getting into a good investing habit 

Of course, most of us don’t have £20,000 (the current annual ISA allowance) sitting around in a bank account waiting to be invested in an ISA. But the good news is that you can still benefit from compounding returns by investing small amounts regularly – an extra contribution of £50 or £100 per month, for example, could make a big difference to your pot.

While you may not be able to invest £20,000 in one lump sum right away at the start of the tax year, our calculations show that contributing monthly can be very worthwhile. Contributing regularly through the tax year has historically generated better returns over the long term than leaving it to the last minute and making a lump-sum contribution at the end of the tax year.  

As set out in the chart above, if you’d contributed £500 every month since 1999 (again until March 2023), you could have accrued £666 in additional returns over the full length of the investment, compared to making a lump sum payment at the end of the tax year.  

Making monthly contributions helps you get into a good habit, so you can look beyond daily fluctuations towards your long-term goals.  

This calculation assumes that you stay invested throughout that period. There is still a risk you could lose money if you were to invest for only a limited time during that same period.

Have you considered a Lifetime ISA?  

If you’re eligible and putting money aside for your first home or your retirement, then a Lifetime ISA (LISA) might be right for you. UK residents aged between 18 and 39 can open one and deposit up to £4,000 per year until the day before their 50th birthday.  

For every pound you contribute, the government will add 25% – in other words, a maximum bonus of £1,000 every tax year until you’re 50. However, if you withdraw the money before you’re 60, and it’s not for the purchase of a first home valued up to £450,000, or a terminal illness, you’ll pay a 25% government penalty. This means you may get back less than you put in.  

If you invest in a stocks and shares LISA with Nutmeg, we’ll invest that extra 25% on your contributions as they come in. Investing the bonus right away means your overall pot has more time in the markets and has a better chance of benefiting from compounding over time. 

How about investing for a child with a Junior ISA?  

If there are children in your family, how about getting in early on a stocks and shares Junior ISA (JISA) which has a £9,000 annual allowance?   

A JISA needs to be set up by a parent or guardian for children under the age of 18, but parents, guardians, friends, or family, such as grandparents, can contribute to the account. The money contributed to a Junior ISA is gifted to the child, meaning only the child can access the money – and only after they turn 18.   

At Nutmeg, you can only open a Junior ISA for a child who is under 16, and it could make sense to be even more of an early bird and open the account as soon as the child is born. 

With no income, capital gains or dividend tax paid on potential growth or returns, the money you invest has the potential to increase in value, particularly over a long-term period of at least three years. Why not help set up your child’s future by adding the 6th of April to the diary to start investing straight away in the new tax year?  

Be an early bird  

Remember, whichever type of ISA works for you, the sooner you start, the sooner you could be on the way to reaching your financial goals. 

Need more information about different tax wrappers? Book a free call with an expert from our team to discuss your options.

Our team can help you to get a clear view on different ISA and pension wrappers, as well as our investment styles. We can review your current investments, and help you to make the most of your allowances. Get ahead with free financial guidance to set yourself up for success. 

Risk warning

As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. The stated figures refer to simulated past performance, which is not a reliable indicator of future performance.

Tax treatment depends on your individual circumstances and may change in the future.  

If you choose to opt out of your workplace pension to pay into a Lifetime ISA, you may lose the benefits of the employer-matched contributions. Your current and future entitlement to means-tested benefits may also be affected. If you are unsure if a Lifetime ISA is right for you, please seek financial advice. 

As with all investing, it is best to take a long-term view of at least three years. Make sure you keep some immediately accessible savings aside for your ‘rainy day’ pot, or for emergencies.