There’s nothing like a deadline to spur us into action. It’s why so many investors find themselves opening ISAs in the final days of each tax year, just before the 5 April cut-off date. But there are also investors who do things a bit differently, opening their ISAs in the first few days of each tax year, on 6 April or just after.   

There are a surprisingly large number of these early bird ISA investors. Last tax year (2023/24), 20% of the customers who maxed out their £20,000 annual ISA allowance with AJ Bell did so between 6th April and 30th April. In other words, pretty much as soon as a fresh annual allowance was available, they took action. There are two compelling reasons why these investors take out an ISA sooner rather than later: to get money at work in the stock market right away, and to save tax. 

WHAT DO HISTORICAL RETURNS TELL US?

We ran some numbers based on investing £5,000 in a typical global fund every year since ISAs began in 1999. If you’d diligently invested on the first day of each tax year, you would now have £19,381 more than someone who had invested on the last day of every tax year. That’s despite putting in exactly the same sum of £130,000 over the past 26 years. Last-minute ISA investors would have turned that £130,000 into £389,208, while the early birds would now be sitting on £408,589.  

The reason for this loftier return is that early birds invest their money for that bit longer. Markets go up and down of course, but they generally rise more than they fall. Since 1999, the typical global fund has returned on average 7.7% from the beginning to the end of each tax year, and has made a positive return in 17 out of 26 tax years. So around two-thirds of the time you would have been better off investing at the start of the tax year, rather than waiting until the end.  

ANOTHER HEADSTART FOR EARLY BIRDS  

There may be another reason to fill your ISA early too, beyond the potential for higher returns, and that’s to save more tax. Once inside the tax wrapper, investments grow free from capital gains tax and dividend tax. So those holding investments outside an ISA would be prudent to put them inside the tax shelter sooner rather than later. This can be done by a process that’s known as a Bed and ISA, which basically just means selling an existing investment and buying it back within an ISA. The sale does count as a chargeable event for capital gains purposes though, so you probably want to try to stay within the £3,000 annual capital gains tax allowance where possible. 

 The early bird tax advantage could be especially valuable now the annual tax-free dividend allowance has been cut to £500. For a higher rate taxpayer already using their £500 dividend allowance, a £20,000 early bird contribution invested in a portfolio yielding 4% would save them £270 in dividend tax compared to putting investments into an ISA at the end of the tax year. A higher rate taxpayer with their full £500 dividend allowance available would save an extra £101.25 in tax, based on the same contribution and portfolio yield. 

INVESTING EVERY MONTH

There’s another popular way to invest in your ISA: doing it monthly. Drip-feeding your money in every month means it’s in the market longer than if you wait to invest all of it at the end of the tax year, giving it longer to grow. And there’s another advantage to investing regularly. Because your money is transferred from your bank account automatically each month, it’s hassle-free and takes the emotion out of investing. So, it can be a simple and smart way to invest.  

Whether you’re a regular saver, an early bird or a last-minute ISA investor, you’re still streets ahead of someone who isn’t contributing to an ISA at all. But if you want to make your money go even further, historical returns tell us it’s the early birds who catch the biggest worms. 

DISCLAIMER: AJ Bell, referenced in this article, owns Shares magazine. The editor (Tom Sieber) and author (Laith Khalaf) of this article own shares in AJ Bell.

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