Why you should use your ISA allowance sooner rather than later

Did you beat the ISA deadline? The 2022-23 tax year came to an end at midnight on 5 April – so if you left any portion of the year’s £20,000 individual savings account (ISA) allowance unused, it’s now too late to put it to work. Still, not to worry. The beginning of the 2023-24 tax year brings with it a whole new ISA allowance.

It might seem like there is no rush to take advantage – and fund managers report that around 20% of all ISA savings typically flow in during the final few weeks of the tax year. But there are good reasons to think about using that allowance sooner rather than later. If you ran out of time in 2022-23, you won’t want to miss out again this year. And even if you’re organised enough not to have to worry about deadlines, there’s an investment case for using this year’s ISA allowance quickly.

The bottom line is that the law of compound interest – the fact that you earn returns on returns already accrued, as well as your starting capital – means investing early makes sense. Put your money into the markets right now, rather than waiting until the beginning of April 2024, and it will be working on your behalf for almost 12 months longer.

The long-term impact of this idea may surprise you. Imagine two investors who have each used their ISA allowance in full over the past decade, investing their money so that it replicates the performance of the MSCI World Index – a basket of global equities. Investor one puts their money to work on 6 April each year, the first day of the tax year. Investor two waits until 5 April, the final day, to use their ISA allowance.

Crunch the numbers and you’ll find that our early-bird investor would have ended up with around £356,350 at the end of the ten-year period. Their last-minute peer, meanwhile, would have ended up with £329,300. That’s almost 8% less.

That’s the past, of course, and for much of the past ten years, global stock markets have performed very strongly. You may also be worried that the strategy of investing early exposes you to the risk of markets falling over the course of the tax year.

The reality, however, is that almost every investment expert agrees that trying to time the market is a mug’s game – you’re almost certain to call it wrong. Indeed, you should only be investing in volatile asset classes such as equities if you can afford to take a long-term view – say five years or more – in which case short-term considerations can be put aside.

The good news, moreover, is that statistics are on your side. The UK stock market, for example, has delivered a positive return over more than three-quarters of the past 40 tax years. There are no guarantees it will do the same this year, but the long-term track record is reassuring.

What if you don’t have £20,000 of cash to invest straight away? Well, here too, it makes sense to be proactive. You can drip feed money into most investment companies – and other funds – via the regular savings facilities that most brokers and online platforms offer. These allow you to invest a fixed cash sum each month over the course of the tax year, so that you use as much of your ISA allowance as possible, albeit gradually.

Taking this approach will mean that at least some of your money goes to work early in each tax year – rather than, say, saving the money in cash to invest in one go at the end of the tax year. And that strategy can pay off too. In the example above, an investor who used their ISA allowance by making 12 equal payments in each month of every tax year would have ended up with a pot worth £344,600. That’s about 3% less than the early-bird investor – but still almost 5% more than the investor who left it until the last minute.