The 2022/23 tax year has officially begun. This means every adult in the UK now has a brand new £20,000 ISA allowance to use by 5 April 2023.
But is there any need to rush to use up your allowance? Let’s take a look at the pros and cons.
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What’s the deal with the ISA allowance?
The annual ISA tax-free allowance refers to the amount you can stash in an ISA over the course of a single tax year. Since the 2017/18 tax year, the annual limit has been frozen at £20,000.
Importantly, any money in an ISA stays tax free year after year. This means you don’t have to pay tax on any interest or returns you earn.
As cash ISAs typically pay lower interest than normal savings accounts, and the fact that most savers don’t have to pay tax on their gains due to the Personal Savings Allowance, cash ISAs are no longer as attractive as they once were.
However, for investors, it’s a different story. That’s because pretty much any investing account can be held within a stocks and shares ISA. So, it’s wise to see them as normal investing accounts but with the added bonus of tax-free returns.
Should you use your stocks and shares ISA allowance straight away?
Given the new tax year is here, you may be wondering when you should use up your annual ISA allowance for 2022/23. Is it worth drip-feeding in a set amount every month? Or is it better to put £20,000 into a stocks and shares ISA in one go?
To answer these questions, it’s worth taking into account that research shows that ‘early bird’ investors could find themselves better off (by as much as £30,000). That’s because by investing early your wealth has longer to grow.
Not only does investing sooner rather than later give your investment more time to grow, but it also gives you longer to benefit from the effects of compound interest. This refers to interest (or returns) earned on previous interest that can soon add up.
Despite this, however, it’s important to understand that using your ISA allowance could backfire should markets take a turn for the worse in the future. For example, if you happen to invest the full ISA allowance this week and markets fall in a few days’ time, then you could have been much better off by waiting to invest, or by taking a drip-feeding approach.
However, it’s worth pointing out that bear markets can rarely be predicted. So, while you may kick yourself if you invest just before markets fall, you’d only be doing so thanks to the benefit of hindsight.
When it comes to investing, it’s best to leave hindsight at the door. However, if you’d struggle to cope with the psychological impact of investing a huge sum right before markets slump, then a drip-feeding approach could be the most suitable investing strategy for you, even if just for the sake of your emotional wellbeing.
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How can you open a stocks and shares ISA?
If you’re looking to invest in an ISA for the 2022/23 tax year, take a look at The Motley Fool’s top-rated stocks and shares ISAs. It’s a good idea to opt for an account with low fees in order to maximise your overall returns. Hargreaves Lansdown is a popular pick for this reason, but do also compare other accounts.
If you’re new to investing, take a look at our investing basics. This guide lists common investing mistakes to avoid and it’s a good first port of call to learn more about the stock market.
Please note that tax treatment depends on your individual circumstances and may be subject to change in the future. The content in this article is provided for information purposes only. It is not intended to be, nor does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.