Earn up to £9k more by topping up your ISA early

Those who top up their stocks and shares ISA at the start of the year could earn thousands more than those who decide to wait. Even those with cash ISAs could benefit from putting money away early. 

Data from AJ Bell shows that an investor who put £3,000 into an ISA in the average global equity fund on the first day of the tax year since 1999 would now have a pot worth £200,373.

Meanwhile, an investor who put away £3,000 on the last day of each tax year would have £191,102 – over £9,000 less. 

The new tax year brought with it a series of changes to tax and allowance that will make maximising your ISA allowance more important than ever. 

We explain why the start of the tax year makes for a better time to make use of your ISA allowance. 

Why you should invest in your ISA at the start of the tax year

“By starting your ISA investments at the beginning of the tax year, small deposits of funds into the market can be achieved,” says Ed Monk, associate director of personal investing at Fidelity International. 

“Over the medium to long term, this may help to smooth the ups and downs of stock market returns and help you ride out any volatility. When you pay money into a stocks and shares ISA, you can hold your money as cash and choose to invest when you’re ready - this can be useful if you’re uncertain of market conditions and don’t want to invest immediately but want to stick to your monthly contributions without feeling rushed into making an investment decision right now.”

Indeed, as Laith Khalaf, head of investment analysis at AJ Bell, points out, early ISA investors in 1999 benefited from the 29% rise in the value of a typical global equity fund between April 1999 and April 2000. However, they would have also suffered losses during the resulting crash after the dot-com bubble burst. 

The same trend played out in the financial crisis. Those who put away money on 6 April 2008 suffered losses of 23% by 5 April 2009. 

But the early ISA investor still came out on top, with a final ISA value of £94,443 compared to £88,044 for the last-minute investor, even if the latter secured shares at a lower price towards the end of the tax year. 

This is because the longer your money is invested, the more time it has to recover as well as compound. 

What if you make smaller ISA contributions? 

Data from Nutmeg shows similar findings. Someone who contributed £6,000 to a medium-risk stocks and shares ISA on the first day of the tax year since April 1999 would have £8,387 more than if they’d waited until the end of the tax year. 

And you can still benefit from compounding returns if you invest small amounts regularly. 

In fact, Nutmeg’s calculations show contributing monthly has historically led to better returns long-term than leaving investing a lump sum at the last minute. 

Those who invested £500 monthly into their ISA since 1999 would have £1,280 more in returns than those who made a lump sum payment at the end of the tax year. 

“You can open an ISA any time during the tax year, which runs from 6 April to 5 April every year,” adds Monk. “If you invest at the start of the tax year, you can benefit from a whole year’s compounding interest or investment returns – so there are potential rewards to be had from starting early.”