Early ISA birds snaffle more worms than last minute ISA investors

It’s that time of year when investors rush to make the most of their annual ISA allowance before the tax year ends on 5 April, with many people leaving this task right until to the last minute. After all, there’s nothing like a deadline to stir us into action. However a rarer breed of investors will be limbering up too, in anticipation not of the end of the tax year, but of the start of a new one. Some investors unflinchingly invest their ISA allowance as soon as it’s available every year, on 6 April. Clearly this means your money is protected from tax from the outset, but it also means you stand to have a bigger ISA pot in the final analysis because your money is at work in the market for longer.

The table below compares the fortunes of early bird ISA investors, who invest on the first day of each tax year, with those of last minute ISA investors, who invest on the last day of the same tax year. In each case the early bird and the last minute ISA investor invest the same amount in total, it’s simply the timing of their investment which differs. The difference it makes is quite startling, and it’s the early bird ISA investor who comes out on top.

A £3,000 annual ISA subscription invested in a global equity fund on the first day of each tax year since 1999 would now be worth £200,373. By contrast that same £3,000 invested on the last day of each tax year would now be worth £191,102, over £9,000 less. You might think that this is just the luck of the draw because of the 1999 dotcom boom, and it’s true that the early bird’s returns were boosted by a 29% rise in the value of the typical global equity fund between 6 April 1999 and 5 April 2000. In other words, the early bird had a big head start.

But that’s only part of the picture. The global financial crisis was a much less auspicious time to be making an ISA investment. Early bird ISA investors would have put their money in the market on 6 April 2008 and had to watch it fall by 23% by 5 April 2009, when the last minute ISA investor swoops in with their subscription, buying shares at much lower prices. Yet the early bird ISA investor still comes up smelling of roses, with a final ISA value of £94,443 compared to £88,044 in the ISA of the last minute investor. That’s because it’s not just performance in that first year that matters in the long run. That early subscription will also be compounded in each year after that, and even if the early bird ISA investor suffers a bad first year, the market recovers in time and that early subscription eventually breaks even, and then makes it into profit.

So if you’re rushing about to make a last minute ISA subscription right now, you might also consider making a subscription in the new tax year too. With the dividend allowance being cut from £2,000 to £1,000 from April, and the Capital Gains Tax (CGT) allowance being cut from £12,300 to £6,000 too, it also makes sense to wrap investments in a tax shelter sooner rather than later to lessen your tax bill. Of course, you may not have the capital available to make two subscriptions at once. A halfway house might be to set up a regular ISA saving plan for next year, which automatically takes cash from your bank account each month by direct debit, and invests it according to your instructions. That way at least some of your money gets into the market sooner, and the regular nature of your investment also makes for a smoother ride.

Value of £3,000 invested each year in the average global equity fund within an ISA

Sources: AJ Bell, Morningstar, total return of the IA Global sector to 22/03/2023, last subscription for the last minute ISA investors assumed to take place on 22/03/2023 rather than 05/04/2023

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These articles are for information purposes only and are not a personal recommendation.

We don’t offer advice, so it’s important you understand the risks, if you’re unsure please consult a suitably qualified financial adviser. The value of your investments can go down as well as up and you may get back less than you originally invested. ISA rules apply.