Why you should use your ISA allowance early

The 2018/19 tax year is almost over, but there is still time, if you have not done so already, to invest your £20,000 ISA allowance.

It’s better late than never. But waiting until the end of the tax year before you use your ISA allowance is not a good idea.

We look at how you can start making the most of your ISA entitlement in in 2019/20.

Are you using an ISA?

ISAs are a very good investment for most people, because they protect your savings from the taxman – which means they can potentially grow more quickly.

They are often described as a tax wrapper that keeps your money safe from tax. All of the interest, income and capital gains generated can potentially grow in your ISA tax free until you want to take your money out. It means that an ISA is a simple and tax-efficient way to potentially grow your wealth over time.

An ISA can form the basis of most people’s savings portfolio – because it ensures you pay no tax on your savings or the interest they earn.

However, they are made a little less simple because of the choice they offer. There are many different types of ISA, including Lifetime ISAs, Junior ISAs, and Innovative Finance ISAs, although the two most important types are cash ISAs and stocks and shares ISAs.

You can decide whether to invest in one particular ISA, or across a few – but whatever you decide, the amount you invest overall will be limited to your annual ISA allowance. This is the limit that the government places on ISA investment each year, to limit the loss to the exchequer caused by the ISA tax efficiency.

In the 2018/19 tax year the limit is £20,000.  It has to be used before April 5 this year, or the entitlement is lost for good.  However, after April 6, when the 2019/10 tax year begins, you can enjoy another £20,000 allowance.

Making the best use of your allowance

Because of the potential of ISAs to offer tax-efficient investment, it makes sense to make the full use of your allowance each year. It is hard to find another way to save that offers the same combination of simplicity and tax benefits.

However, how and when you make your investment and use your allowance can make a big difference to the returns you can eventually enjoy.

Many people make the mistake of leaving their ISA investment until the end of March. It does mean that they will still be able to take advantage of their annual allowance – but by leaving it late, they miss out on the power of the ISA to grow their wealth.

Remember, one of the biggest truths in investment is that time is money – the more time you leave your money invested, the longer it has to potentially grow and the larger your investment pot can be.

If you invest your full allowance at the beginning of each tax year rather than at the end, your money will have a whole year longer to potentially grow tax-free. This can add up to a lot of extra money in your ISA if you invest your whole £20,000 allowance.

Of course, not everyone will be in a position to invest £20,000 every April – but the more you put in, and the earlier you do it, the better off you can be. You can always make additional investments into your ISA later in the year, as long as you stay within your £20,000 limit.

Finding out more now

If you are ready to start making the most of your ISA entitlement, download our expert guide to savings & investments and talk to your Continuum advisor.

The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable investment strategy, you should seek independent financial advice before embarking on any course of action.

The value of investments can fall as well as rise and you may get back less than you invested.

Investors do not pay any personal tax on income or gains, but ISAs do pay unrecoverable tax on income from stocks and shares received by the ISA managers.