We’re huge fans of the Stocks and Shares ISA here at The Motley Fool. These products save investors from having to pay tax on any capital gains and dividends they enjoy. The £20,000 annual allowance is also more than enough for most UK investors.
Investors can utilise that £20,000 over the course of the tax year. But those that make use of this early on can reap huge rewards, according to Sarah Coles, head of personal finance at Hargreaves Lansdown.
Tax benefits
The sooner investors get their money working for them, the better. But there are other advantages to investing early in a Stocks and Shares ISA.
Coles says that “as a general rule, the earlier you use your ISA allowance in the tax year, the more opportunity you have to save tax, and this year getting in as soon as possible is particularly valuable.”
A halving of the dividend tax allowance, to £500, means share owners are in danger of paying tax on cash payouts earlier in the year.
A reduction of the capital gains tax allowance, to £3,000, also leaves investors at risk of writing large cheques to the taxman. Coles notes that “switching into an ISA on day one gives you the freedom to sell what you want when it makes the most sense for your finances, without thinking about tax.”
The ‘Bed and ISA’ principle — where someone sells their non-ISA investments and buys them back inside the tax wrapper — involves cost and some hassle. But the tax advantages often make this a worthwhile exercise.
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.
Millionaire moves
As I say, the sooner investors begin using their annual ISA allowance, the more time their money has to multiply. By compounding their returns through capital gains and dividend reinvestment, they have a real chance to supercharge their long-term wealth.
A quick glance at the investing habits of ISA millionaires shows the huge rewards that buying shares early as possible can bring.
Hargreaves Lansdown says that 30% of millionaires on its books used their full allowance within the first month of the tax year. In total, 54% used their annual allowance within three months of the new tax year beginning.
A top FTSE 100 share
I’m building a list of shares to buy for my own ISA in the next few weeks. One of these is M&G (LSE:MNG), which is one of many FTSE 100 stocks I think is undervalued at current prices.
Today, the financial services provider trades on a forward price-to-earnings (P/E) ratio of 9.9 times. It also boasts an enormous 9.1% dividend yield.
M&G’s low valuation reflects the possibility of subdued profits growth as the UK economy struggles. But as someone who invests for the long haul, I’m happy to endure some near-term turbulence. And I think the eventual benefits of owning this share could be considerable.
As the UK’s older population rapidly grows, M&G is in good shape to ramp up sales of its savings and investment products. But this isn’t all. It has considerable balance sheet strength (with a Solvency II ratio of 203%) to help it make the most of this opportunity.
And of course, that robust capital base gives it scope to keep paying enormous dividends. On balance, I think buying M&G shares early on could deliver fantastic rewards.
