If you have savings and you make this mistake this year, it could cost you a massive £714.
These days the ISA season has become a pretty big event in the financial calendar. That’s because it’s traditionally a time when thousands of savers make a mad dash to get their ISA applications in before the end of tax year deadline on April 5th.
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Use it or lose it
This date is particularly important to savers who want to maximize their tax-free returns since the ISA allowance we’re all entitled to expires on April 5th each tax year. And since it can’t be carried over to the next tax year, it’s a case of use it or lose it.
Why it’s a mistake to wait
But I think it’s a huge mistake to wait for the ever popular end of the ISA season rush. Instead, you should be taking out your ISA now at the beginning of the tax year. If you hold off until April 5th 2011 before you invest, you’ll have missed out on a whole year of tax-free growth. Not very savvy, is it?
Ideally, I’d like to get away from the idea of an ISA season, and persuade savers that starting as early in the tax year as they can - rather than holding off until the latest possible opportunity - is a smart move.
How much will I lose if I wait?
If you wait, how much could you lose by missing out on capital growth over the next year?
Let’s take a look at the difference in the value of your ISA if you invested the full allowance in a stocks and shares ISA on April 6th - which is the very first day of the tax year, compared with the same investment made on April 5th - which is the very last day of the tax year.
Remember, in the 2010/2011 tax year, we all benefit from a more generous ISA allowance of £10,200. You could choose to put the entire amount into a stocks and shares ISA, and take your chances on the stock market. Alternatively, you could save a maximum of £5,100 in a cash ISA, and put the remainder in stocks and shares if you wish.
Recent question on this topic
- suilvenms asks:
Are Stoscks And Shares ISAs still worthwhile?
- Swarbs answered "The only benefit in investing in ISAs is if you exceed your annual CGT allowance. However, if you..."
- suilvenms answered "Thanks for the informative scenarios and excellent reply. Just a few points. My own experience is..."
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Now let’s say you invested the full £10,200 allowance back on April 6th 2010. After a year, your ISA could be worth £10,914 if it grew at the rate of 7% (which is the industry standard projection rate), after charges.
That means savers who hold back their investment for a year until April 5th 2011 would lose £714 in one year alone! And if you made that mistake every year, your losses would soon add up. Now that really doesn’t make much sense.
It’s the same story no matter what type of ISA you choose. If you put the maximum £5,100 allowance into the market-leading cash ISA - which is the Santander/Alliance & Leicester Flexible ISA - with a rate of 3.20%, you would earn £163.20 after a year tax-free. But late starters would have to kiss this interest goodbye.
Don’t pay tax
Of course, you might not lose out on all that money if you kept your savings in an alternative interest-bearing account until the end of the tax year before moving it into an ISA. But there’s really very little sense in doing that since you’ll have to pay tax on any interest you earn.
For instance, if you put £5,100 of your savings in the top ordinary taxable savings account -which today is the West Bromwich Building Society Direct Bonus Acccount 1 with a rate of 2.92% -you would earn £148.92 gross after a year. But once tax has been deducted, you would only actually receive £119.14 if you’re a basic rate taxpayer. Meanwhile, higher rate taxpayers would only earn £89.35, which is barely more than half of the return paid by the most competive cash ISA.
So, always remember, losing out to the taxman can easily be avoided by putting your savings in an ISA from the outset instead.
Even worse, if you simply left your ISA savings to build up in a non-interest paying current account first, then you really will forego all the return you would otherwise earn by setting your ISA up on day one of the tax year.
So, I think there’s a very strong argument for investing spare cash in an ISA now, rather than the waiting until the next ISA season. To help you find the best home, check out Top 10 cash ISAs for the new tax year. And if you’re interested in stocks and shares, don’t miss Make a fortune with your ISA.
More: How to fill your ISA for free | The best ISA for every budget