With the annual ISA contributions deadline coming up next week, what is my best course of action as I aim to build my wealth?
What is the ISA deadline?
The deadline – Wednesday 5 April — is for contributing funds to an ISA, not the same as investing those funds.
So I could put money into my ISA now, up to my annual limit. But I can then leave the money sitting in the ISA for days, weeks, months or even years if I so choose before investing it.
Right now I see a number of bargains in the UK stock market so I would have no difficulties investing my entire ISA allowance! But different people have a variety of investment objectives and styles.
In another time where I felt there was less value on immediate offer, I could imagine putting money into an ISA just so I utilised my tax-free ISA allowance for the year and then figuring out how to invest it later on.
Why not wait?
But what would be the point of that? After all, on 6 April the new tax year will begin. I will get another ISA allowance for the year. I could just wait until I knew what shares I wanted to buy before putting money into an ISA in the next tax year.
Although that is true, if I did that I would only be utilising my ISA allowance for next year. If I park money in an ISA before next week’s deadline, I could still put more money into a new ISA in the next tax year. So acting before the current tax year’s ISA deadline basically means I do not lose the benefit of this year’s ISA allowance and, in due course, can use next year’s ISA allowance too.
Using an ISA to my advantage
Putting money into a Stocks and Shares ISA offers me certain tax benefits versus making the same investment outside such a vehicle.
One of those, which I plan to use to my advantage, is accruing dividends inside the ISA rather than withdrawing them as cash. Once I withdraw, the cash is just cash like any other. If I use that cash to make investments, it will be subject to standard tax treatment. But by contrast, if I leave the money from dividends inside the ISA, I can invest it alongside the other funds in my ISA.
Over the course of time, that could turn out to be significant.
This year I can contribute up to £20,000 in total before the ISA deadline. But, for example, imagine I put that money into shares that compound at 10% annually. After a decade, I could have shares and cash worth over £50,000 in my Stocks and Shares ISA, despite only contributing £20,000 in the first place.
Rather than just let another ISA deadline pass me by without doing anything about it, I am focusing on how best to make it improve my financial wellbeing!
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither 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.
