ISA savers can use the products to avoid some of Rachel Reeves’s tax raids. (Image: GETTY)
Savers and investors have a brand-new £20,000 ISA allowance to mark the start of the new tax year on April 6, and many will be keen to use it as early as possible. With Chancellor Rachel Reeves driving the UK tax take to an all-time high, it makes sense to take full advantage of the tax wrapper. Especially since from April next year, the Cash ISA allowance will be reduced to £12,000 for the under-65s.
With markets volatile due to the war in Iran, many will be wary of putting money into a Stocks and Shares ISA right now. Yet there is also plenty of evidence suggesting that early bird investors who get cracking at the start of the tax year do better than those who leave it to the last minute. So what should you do?
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Early
Some investors aren’t hanging around. One customer at fund platform Bestinvest made their first ISA subscription at 12.48am on April 6, while another had used their entire £20,000 allowance by 8.29am.
Bestinvest personal finance analyst Alice Haine said investing in an ISA is even more important due to the freeze on tax thresholds, which runs until 2031. “Millions more workers will gradually get dragged into higher rates of taxation as their incomes rise.”
She added: “Steep cuts to the capital gains tax exemption, now just £3,000, make taking advantage of ISA tax efficiency even more crucial.”
The Personal Savings Allowance, which lets basic rate taxpayers earn £1,000 a year in non-ISA savings interest tax-free and higher rate taxpayers £500, has been frozen since 2016.
From this month, Reeves also imposed a 2% surcharge on dividend income above the £500 allowance, Haine said. Dividend tax now stands at 10.75% for basic rate taxpayers and 35.75% for higher rate taxpayers. The additional rate charge is unchanged at 39.35%.
The tax squeeze does not stop there. From April 2027, the same 2% surcharge will apply to savings interest above the Personal Savings Allowance. Haine said: “Whether saving or investing, it’s wise to move funds into an ISA where interest, dividends and gains are sheltered from tax.”
Acting early in the tax year avoids a last-minute dash and gives money longer to grow, she added. “Early action gives you the benefit of a whole 12 months of potential tax-free returns.”
Action
The case for early action is backed by hard data. Analysis from passive fund manager Vanguard shows that investing at the start of the tax year can significantly boost returns compared to waiting until the deadline.
An investor putting £20,000 into a spread of global shares at the beginning of each tax year over the last decade would have built a pot of £393,102. Waiting until the end of each year would have delivered £349,234, around £44,000 less.
James Norton, head of retirement and investments at Vanguard, said: “While investing a £20,000 lump sum at the start of the year isn’t realistic for most people, the real takeaway is that time in the market really matters.”
The key is to make money work as early as possible, he added. “Especially when inflation is eroding the value of cash left sitting on the sidelines.”
Wealth
Investing is about building wealth over the long term, but many households are under pressure as rising oil prices threaten another inflation shock.
More than half of UK adults say they feel stressed about their finances as rising bills stretch budgets, according to Interactive Investor research.
Interactive Investor senior manager Camilla Esmund said: “For many, the focus is on managing rising costs and keeping things steady. But if you are in a position to put something aside, even small amounts, this can help.”
In uncertain markets, it is easy to feel tempted to sit on the sidelines, but investing is about taking a long-term view, she said. “History shows us that markets can and do bounce back over the long-term.”
Regular
For nervous investors, regular investing can be a more reassuring alternative than buying in a single large lump sum. “Drip-feeding money into the market can smooth out volatility, making it an effective way to manage risk and build confidence over time,” Esmund said.
Regular investing also builds discipline. “Setting up a monthly direct debit into a diversified Stocks and Shares ISA can make investing feel more manageable and remove the temptation to delay decisions.”
Cash
While investing is riskier than leaving cash in the bank, it is more rewarding over the long run, said Brian Byrnes, director of personal finance at Moneybox. “Yet millions still hold their savings in cash rather than participating in the market.”
However, this is a personal decision, and older savers may be reluctant to take on stock market risk in later life, as their money has less time to recover from any losses.
They should still make full use of their Cash ISA allowance, which remains at £20,000 this year and will also stay at that level next year for those aged 65 or over.
A rare positive from the current crisis is that it will deter the Bank of England from cutting interest rates, giving savers the opportunity to get a better return on their deposits. Despite the attractions of stocks and shares, for many pensioners, the Cash ISA is still king.