A new tax year has begun and with it the chance to start thinking about making the most of your 2024-25 individual savings account (ISA) allowance.
You might be wondering what the hurry is, given that there are 12 months to go until the tax year ends. But when it comes to growing your long-term wealth, the data suggests it’s usually better to act sooner rather than later.
No time like the present
Our research shows that someone who invests £20,000 (the current ISA allowance) at the start of each tax year could build up a much bigger pot of money than if they wait until the end of the tax year to do so.
In our analysis, our hypothetical investor invests £20,000 on 6 April 2024, followed by an additional £20,000 at the start of every subsequent tax year. Assuming an annual investment return of 5.5% after charges, their pot would be worth £1,079,320 by the end of the 25th year.
But if they wait until the end of each tax year to invest (i.e. every 5 April starting from 2025), their pot would be worth £1,023,052 after 25 years – that’s around £56,000 less.
Investing at the start of the tax year vs the end
Notes: This hypothetical scenario is for illustrative purposes only and doesn’t represent a particular investment or its expected returns. It assumes annual returns of 5.5%. Balances reflect the value at the end of each period. The chart doesn’t account for taxes and management or platform fees.
Early and often
Encouraging people to invest early and often is in keeping with our mission to help investors achieve the best chance of long-term investment success – and all the more so if it means taking advantage of legislation that is designed to save them tax.
Of course, not everyone can invest £20,000 a year, let alone in one go. But if you do have a lump sum of money that you don’t need for your emergency fund or short-term spending needs, why not put it to work in the market sooner rather than later? After all, it’s time in the market, not timing the market, that counts. While investments can go down as well as up and you may get back less than you invest, history shows that patient investors tend to be rewarded over the long term.
If you don’t have a lump sum of money to invest, you could take advantage of the new tax year to set up or increase your regular investments instead. At Vanguard, you can set up a direct debit directly from your bank account, so there’s no chance of forgetting to make the payment.
The power of compounding
One of the reasons why investing early on is so powerful is that it gives you more time to benefit from compounding.
Compounding is when you earn returns on your returns as well as on the money you invest. This can help your investments to grow more quickly.
It’s akin to a sort of snowballing effect and it’s why, in the example earlier, our hypothetical investor ends up with an extra £56,000 by investing at the start of the tax year rather than at the end. You can read more about compounding in this article.
So, now that a new tax year has started, why waste a year by waiting until next April to invest when those extra 12 months could make a big difference to your wealth in the long run?
Investment risk information
The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.
The eligibility to invest in either ISA or Junior ISA depends on individual circumstances and all tax rules may change in future.
Important information
Vanguard Asset Management Limited only gives information on products and services and does not give investment advice based on individual circumstances. If you have any questions related to your investment decision or the suitability or appropriateness for you of the product[s] described, please contact your financial adviser.
This article is designed for use by, and is directed only at persons resident in the UK.
The information contained herein is not to be regarded as an offer to buy or sell or the solicitation of any offer to buy or sell securities in any jurisdiction where such an offer or solicitation is against the law, or to anyone to whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so. The information does not constitute legal, tax, or investment advice. You must not, therefore, rely on it when making any investment decisions.
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