Independent financial expert Harvey Jones
answers a reader’s query about when it's best to top up his ISA
“My friends are telling me to top up my ISA now, at the start of the tax year, rather than wait until March next year. Does it really make much difference?”
Your friends have a point. It makes sense to take out an individual savings account (ISA) bright and early, rather than leaving it to the last minute.
By hanging around, you’re simply throwing money away. And why would you want to do that?
Your ISA allowance is hugely valuable, because it allows you to save money in cash and shares without paying any tax on the profits.
Over the years, it could save you thousands of pounds in income tax and capital gains tax. That’s why it makes sense to make full use of it as soon as you can.
Every UK adult can save up to £11,280 in an ISA during the 2012/13 tax year – up by 5.2% from the £10,680 allowance last year, meaning you can shield even more of your hard-earned savings from HM Revenue & Customs.
You can pay up to half this amount, £5,640, into a cash ISA and any amount into a stocks and shares ISA as long as your total investment for this year does not exceed the £11,280 limit.
The ISA allowance works on a ‘use it or lose it’ basis. If you don’t use part or all of this year’s allowance by the annual 5 April deadline next year, you have lost it for good.
Your new allowance always starts on 6 April, the day after the old one ends. You might think there would be a rush to take out ISAs at that point, but there isn’t. The panic happens at the end of the tax year, when people suddenly rush to mop up their allowance before they lose it for good.
If you have a bit of money to spare now, there is absolutely no point in leaving it that late. The earlier you tuck it into an ISA, the sooner you start saving tax.
Say you have £5,000 in a standard savings account, earning 2%. That will earn you £100 worth of interest over 12 months. If you’re a 20% taxpayer, you will pay £20 of that to the taxman, while a 40% taxpayer pays £40.
If you shift that money into a cash ISA, though, you don’t have to pay any tax at all. In fact, you don’t even have to declare it on your self-assessment tax return.
Saving £20 or even £40 may not sound much, but if you keep that money invested in your ISA, you will also earn compound interest on the tax saving, year after year.
And if you are just as quick off the mark next year, and the year after that, you will save more and more tax, with compound interest on top.
That’s good news for you, bad news for the taxman.
There is another reason to start hunting for a new cash ISA as soon as you can. You could be able to get a better interest rate on your savings by shopping around for a better deal.
Many savings accounts pay as little as 0.5%. The best easy access cash ISAs pay around 3%. If you are prepared to lock your money away for several years in a fixed-rate bond, you could get anything up to 4.5%.
That’s another reason to act sharp.
It also pays to act promptly if you’re planning to take out a stocks and shares ISA.
Many investment funds pay regular dividends to investors, which can be worth anything between 3% and 7% of the money you invest. That’s on top of any capital growth.
The sooner you take out your ISA, the sooner you can start banking those dividends.
Investing in stock markets is risky, because share prices can fall sharply in a matter of days. Many people reduce the risk by investing a regular monthly amount, rather than throwing in a single lump sum.
If you want to do this, setting up your ISA early allows you to spread your payments across the full 12 months of the tax year, reducing your investment risk.
If you wait until next March, however, you will have to throw in your money in a single go. That will leave you at the mercy of a sudden dip in stock market fortunes.
As I said, on this occasion you should listen to what your friends are saying. ISAs are complex, though, so if you are buying stocks and shares, you might also want to consider taking independent financial advice as well.
- If you have a general financial query or dilemma unrelated to a specific financial services provider, email Harvey at firstname.lastname@example.org.
- Harvey regrets that he cannot answer your questions individually. These are his personal views and not those of Virgin Money. Nothing in the article constitutes legal, financial or other professional advice.
- If you have a specific financial concern, you should always seek your own professional financial advice.
- Links to external websites are for information only. Virgin Money receives no income from them and accepts no responsibility for the website content.
Read previous Ask the Expert articles answering readers’ queries on:
- Is it cheaper to move house or extend?
- Which credit card is right for you? (part 2)
- Which credit card is right for you? (part 1)
- The cost of going to university – and the help available
- Understanding pension reforms
- Renting out your home
- Good foreign currency deals
- Getting refunds in shops
- The personal impact of tax rate changes
- Making the most of your ISA
- Planning for your children’s financial future
- Mortgages available for first-time buyers
- The impact of the VAT increase
- The cost of starting a family
- What to do with monthly savings of £200
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Links to external websites are for information only. Virgin Money receives no income from them and accepts no responsibility for the website content. The information in this article is correct as at 6 April 2012.