In the savings and investment industry, the first few months of each year are known as “ISA season”. With the end of the tax year on the 5th April, the ISA and Junior ISA contribution allowances reset and savers and investors rush to use their remaining allowances before they expire.
This makes sense: using your Junior ISA and ISA allowances is one of the few legal ways to avoid paying tax so maximising the usage of all your allowances is a good thing to do if you are an investor or saver.
We see this at Beanstalk with the first quarter of each year being the highest for contributions. But we also see this continuing into April – after the end of the tax year – and even May with people putting in lump sums to use their ISA allowances for the following tax year. I suspect they have worked out that there are some good reasons to use your contribution allowances early in the tax year rather than wait until the end of the tax year.
There are three main reasons why you might think about using your ISA and JISA allowances early in the tax year.
Your money benefits from a longer tax-free period
Using your ISA and JISA allowances early in the tax year means your money has more time to potentially benefit from tax free growth. Clearly there is no guarantee that investments will increase in value during the year but if they do, any growth is tax-free as is any income such as interest or dividends.
Making a contribution in, say, the beginning of March benefits from one months tax free “cover” before the new tax year. Making the same contribution at the beginning of May, 10 months before, benefits from an 11 month tax-free period before the start of the following tax year.
You can spread your contributions over the tax year
Starting early in the tax year gives you the opportunity to spread your contributions over the year potentially through setting up a regular monthly contribution. If you are investing and the markets are going up and down, this can mean that you average out the price you pay for the investments.
You can avoid last minute pressure
Waiting until the end of the tax year to make large lump sum contributions carries the risk that you have to choose between investing at a time you may not want to or losing your allowance for that tax year.
There is no guarantee that the beginning of April is the best time to invest so starting earlier gives you more opportunity to choose your timing.
Ultimately the key thing is to ensure you use your contribution allowances when saving and investing because if you are saving or investing outside an ISA or Junior ISA and have unused allowances, then you are potentially liable to tax that you could easily avoid.