Why the young should fill their Isas

Back in 1582, Pope Gregory XIII ordered a change of calendar. Up until then, everyone had used the Julian calendar (named after Julius Caesar) and had done since 46 BC.

This had 11 months of 30 or 31 days and a 28-day February (extended to 29 days every fourth year). This sounds much like the calendar we use today – and it was. However, it differed from the solar calendar by 11.23 minutes a year.

That doesn’t sound like much. But over the centuries it does add up: by the 1500s, the Julian calendar was behind the solar calendar by ten days. So the Pope, who found that the shifting calendar was playing havoc with the timing of Easter,  decided to set things straight by starting again with his new calendar – the Gregorian.

He issued a papal bull announcing that that the day following Thursday 4 October was not to be 5 October but 15 October. He also changed the rules on leap years: they were now to come in all years that are divisible by four, but not by 100 (unless they are also divisible by 400), to stop things getting out of sync again.

Most of Europe gradually got around to adopting the system. The UK took a couple of hundred years to get used to the idea, but eventually it too capitulated: Wednesday, 2 September 1752 was immediately followed by Thursday 14 September, and that was that.

Julius Caesar had set the New Year at the spring equinox (25 March at the time). The Treasury decided that the taxation year in 1752 would remain as long as usual (365 days), so in order to compensate the state for the 11 lost days, it moved the end of the tax year to 4 April, and then on to 5 April to make up for a lost leap year. There it has stayed.

I’m telling you this only as a slightly more interesting way of leading into a few more comments on Isas, and the fact that if you haven’t protected this year’s cash from the usually overly sticky hand of the taxman yet, now’s your chance: you’ve only got nine days left to do it.

 

Thanks to Pope Gregory XIII, the new tax year is almost upon us. I’ve written here several times before about my mild preference for Isas over pensions (it is all about simplicity).

But it occurs to me that there is extra reason for the young to be particularly keen on Isas: they give savings flexibility, which is nice; but they also give the ability to defer tax relief. If you are currently a 20% taxpayer, but you anticipate being a 40% taxpayer in the future, you can save into an Isa now. Then, when your tax rate has risen, you can shift the cash into a pension and claim back 40% instead of 20% – even though the money was earned when you were only paying tax at the lower rate.

George Osborne clearly intends to make us a nation of 40% taxpayers before too long: his budget will have dragged another 1.3 million people into the top rate band by 2014, so the wait before you move the money might not be particularly long.

I don’t suppose that this is the kind of move that the Treasury particularly approves of, but it’s the kind of thing that happens when you make a tax system unduly complicated.