Is it worth being an ISA early bird?

It’s the start of the new tax year this week, meaning investors can make the most of a brand-new ISA allowance of £20,000. ISAs – or Individual Savings Accounts – are rightly popular thanks to their flexibility and exemption from capital gains and income tax. Think of an ISA as a wrapper around your investments that prevents bites being taken out by tax, so you get to keep more of your returns.

Generally, the earlier you use your ISA allowance in the tax year, the more opportunity there is to save tax. Your money is protected from the outset and with both the dividend and capital gains tax allowances being cut again this year that could be particularly valuable. Switching investments from a general investment account into an ISA so they’re protected going forward, otherwise known as a ‘Bed and ISA’, could be worthwhile.

But does it matter when you use your ISA allowance when investing new money? You can’t carry any of the £20,000 ISA allowance forward to use in subsequent tax years, but so long as you put your money in by the 5^th of April you can utilise it in full. You therefore have a range of options.

So is it better to be an ISA ‘early bird’ and contribute as much as you can at the start of the tax year, drip it in over the course of the year, or top up just in time to meet the deadline?

Putting your money to work early in the tax year can pay dividends, literally. Your money is working for you for longer, and you can start to benefit from the compounding of returns from an earlier point. This can be advantageous, although it’s not always the case, especially taking an individual year in isolation, because of the vagaries of markets. This is illustrated in the chart below which shows the returns from global equities as measured by the very broad MSCI World Index from the start until the end of each of the past ten tax years.

Table: ‘Early bird’ ISA % returns from global shares by tax year

Source: FE FundInfo, MSCI World Index, total return basis with net income reinvested.

This shows that in only three of the past ten tax years you’d have been better off waiting until the end of the tax year, compared with the very start, to make your ISA investment. In each of the other seven years you would have been better off being an ‘early bird’, sometimes substantially so.

However, if you make a habit of being an early bird – rather than a last-minute dasher –what difference does that make over a long period? Here are the numbers over 10 years, and over 25 (since ISAs were introduced in 1999) with £6,000 invested either at the start of the tax year, the end of the tax year, or split up into monthly chunks:

Chart: Total Stocks & Shares ISA value investing £6,000 in global shares each year since 2014

Source: FE FundInfo, MSCI World Index, total return basis with income reinvested. Monthly calculations are based on an investment on the 12^th of each month. Early bird investor contributions made on the 6^th of April each tax year and last-minute investor on the following 5^th April. Data from 06/04/2014 to 05/04/2024.

Chart: Total Stocks & Shares ISA value investing £6,000 in global shares each year since 1999

Source: FE FundInfo, MSCI World Index, total return basis with income reinvested. Monthly calculations are based on an investment on the 12^th of each month. Early bird investor contributions made on the 6^th of April each tax year and last-minute investor on the following 5^th April. Data from 06/04/1999 to 05/04/2024.

The calculations show that over time being an early bird and consistently investing your full ISA allowance – or as much as you can afford to – as early in the tax year as possible can help achieve your goals faster.

For instance, if you’d contributed £6,000 to stocks and shares ISA invested in global shares on the first day of each tax year since 6th April 2014, you could have made over £13,000 more than if you’d waited until 5th April the following year. The extra year of investment, when compounded over the years, can make quite a difference. In this example, more than a couple of years of contributions. However, remember past performance is not a reliable guide to future returns.

Of course, it’s not always possible to invest a lump sum, especially the full annual ISA allowance of £20,000, at the start of the tax year.

The calculations show that contributing monthly has historically generated better returns over the long term compared with making a lump-sum contribution at the last minute each tax year.

For instance, if you’d contributed £500 every month since 2014, you could have accrued £6,000 in additional returns, compared to making a lump sum payment at the end of the tax year. The rule of thumb, therefore, is that the sooner you put money to work, the sooner you’ll be on the way to reaching your financial goals, though it doesn’t always work out that way when looking at individual years because investments can fall as well as rise, especially in the short term.