I hope you spent the Easter Weekend Bank Holiday like I did – cooped up inside on the sofa with your laptop, planning your next financial moves.
Actually, I hope you didn’t spend it like I did!
Okay, so there were mitigating circumstances for my Spring-shunning behaviour – and I did manage to get out on Sunday to see that yes, the sun does still exist, despite six months of meteorological propaganda to the contrary – but the truth is, like most people, I could do with less screen time and more time wishing I’d brought my sunglasses.
But there was one part of my weekend budgeting festivities that I suggest you, too, crack into straight away.
And that’s to decide how you’re going to use your next ISA allowance – and then use it.
This is the season
Now I know what you’re thinking…
Didn’t we just go through ‘ISA season’ and all those articles, advertisements and pitches from pundits urging us to open an ISA before the April 5 deadline?
Yes – but a brand-new tax year started on Monday, which means you have just been granted a fresh year’s allowance!
And in my opinion, if you plan to put more money into your ISA and can afford to do so, there’s no point waiting 11 months and a couple of dozen days to do so – however much ISA season has become ingrained as make-your-mind-up time for ISA investors.
Rather, make your mind up now, if you can.
Three good reasons to get going
Of course, most people don’t have the ISA allowance – £15,240 for this year – just lying around in cash, waiting to be deployed when the starting gun is fired on a new tax year.
But some do – and we know that many others will save up a lump sum over the course of the year before looking to deploy it come Spring 2016, because that’s why the last-minute ISA frenzy happens after all.
To which I say: what are you waiting for?
1. Enjoy immediate tax protection
The big benefit of holding shares within the tax-resistant walls of an ISA accrues over decades, as your investments grow unthreatened by capital gains tax (CGT).
But if you’re a higher-rate taxpayer, you’ll also benefit from protecting any income your shares pay from tax – and that benefit starts from the moment you receive your first dividend.
In fact, if you’re a higher-rate or additional-rate taxpayer and you hold shares that pay dividends outside of an under-filled ISA then you’re throwing money away.
Higher-rate taxpayers pay an effective tax rate of 25% on their dividend income, while those with gross incomes over £150,000 will have to surrender around 30% of their dividend income to HMRC.
If you were invested in a higher-yielding share like Royal Dutch Shell (LSE: RDSB) then this would amount to over £200 in tax that you could have avoided by getting your shares into an ISA at the start of the tax year.
Why delay?
2. The upcoming General Election
ISAs are very popular savings vehicles, and I don’t expect any of the parties to immediately tinker with them should they win power in the General Election on May 7th.
However, there’s a related area that I do think some parties are keen to meddle with, and that’s capital gains tax – whether the tax rate itself, the annual CGT tax-free allowance (£11,100) or both.
This is relevant to filling your ISA because a lot of people raise their new ISA contributions by selling a sufficient number of unsheltered shares they hold in ordinary dealing accounts.
Indeed, every year brokers drum up a bit of extra commission by encouraging people to do what for quirky reasons is called “Bed and ISA-ing”.
This sees investors selling shares that show capital gains (but not enough to put them over their annual CGT tax-free allowance) and then repurchasing the shares within an ISA.
It’s a sound piece of tax-planning strategy, but it could be threatened if noises from some corners about tinkering or even scrapping the way the CGT regime works amounts to anything.
I won’t delve into whether reviewing the CGT regime is right or fair or a vote winner. That’s not my job.
However, from an investing standpoint, given that there’s nothing to lose by Bed-and-ISA-ing today if you can…
Why delay?
3. An extra year of tax-free compound interest
To me, it never made much sense to have your funds sitting in cash for the best part of 12 months until a few days before the panicky end of the ISA season.
But with interest rates near zero and your cash earning near zilch as well, it makes no sense.
If you’re investing instead in shares in the hope of a meaningful positive return, then it is wise to be invested as soon and for as long as possible.
For one thing, we may think in terms of annual deadlines, but the market doesn’t work that way.
Every day it goes up and down, and the fact is that if you wait until, say, 5 April 2016 to fill your ISA, then you may have missed a year’s gains.
This can make a big difference over the long term.
As an illustration:
- £15,240 growing at 10% for 20 years amounts to £102,527
- £15,240 growing at 10% for 19 years sees that final sum reduced to £93,206
Of course it’s perfectly possible that the market could go down between now and April 2016.
But that risk is always there with shares.
Most years the market goes up, and so most of the time it makes sense to invest as soon as you have the planned funds available – delaying only means you’re likely to forgo gains.
Given that in an ISA those gains are tax-free, I must say I’m surprised you’re still reading me, as opposed to hotfooting it back to your online broker, debit card in hand…
Why delay?
