The end of the tax year is well known for being ISA season, when savers and investors rush to beat the 5 April deadline to make the most of their £20,000 annual ISA contribution.

But in the background a hardy bunch of investors are just biding their time at the beginning of April, waiting for the new tax year to roll around, so they can pounce on their new ISA allowance as soon as it becomes available. These ‘early bird’ ISA investors make the most of the tax protections afforded by the ISA wrapper, but they also typically benefit from being invested in the market for longer too.

GETTING IN EARLY

An early bird ISA investor who saved £5,000 into an ISA on the first day of every tax year since 1999 would today have £19,259 more than a last-minute ISA investor, based on investment returns from the average global equity fund. These investors have saved precisely the same amount into an ISA, but that extra year of investment, when compounded over time, makes an awful lot of difference. It equates to almost four additional years of contributions in this example. 

Early birds might not always get lucky. But even if you happen to invest at a dreadful time, in the long term you can still expect to come up smelling of roses if you put money to work in the market sooner rather than later. Early bird ISA investors in April 2008 would have had to watch their investment plummet by 23% over 12 months as the financial crisis rocked the global stock market. Even so, by following the same strategy each year, early birds starting their £5,000 a year investment plan in 2008 would now be £13,585 ahead of comparable last minute ISA investors.

USING THE FULL ALLOWANCE STRAIGHT AWAY

Looking at DIY investors on the AJ Bell platform, it’s noticeable how many early bird ISA investors use all of their ISA allowance right away. In the last two years 36% of early bird ISA investors used all their ISA allowance immediately in April. This compares to more like 5% in other months of the year.

This suggests there is a significant cohort of investors who have cash or investments burning a hole in their pocket each year that they want to get tucked up in a tax shelter as soon as possible. Doing so at the beginning rather than at the end of the tax year means protecting investments from dividend and capital gains tax for an extra 12 months. Hence why these early bird ISA investors are keen as mustard to use their allowance as soon as the new tax year rolls around.

This early bird tax advantage could be especially valuable this year seeing as the dividend allowance is being cut to £500. If you’re already using the £500 allowance elsewhere, a £20,000 early bird contribution invested in a portfolio yielding 4% would save a higher rate taxpayer £270 in dividend tax compared to a last-minute ISA investor holding the same portfolio outside the tax shelter until the end of the year. Many people leave their ISA contribution to the end of the tax year as they don’t have the money available right away. But those who do might find themselves quids in by getting a wiggle on.

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