Don’t leave your Isa to the last minute

THE advent of spring is not just a time to enjoy the abundance of flowers, longer days and watching newly-born lambs in the fields. It is also when smart investors can take advantage of new allowances to give investment portfolios a fillip.

This is because April marks the start of a new tax year and with it a fresh set of incentives to boost taxfriendly investing via pensions and Individual Savings Accounts.

New allowances also let investors take some tax-free profits from equities or funds held outside a pension or Isa – and shield limited amounts of income, whether from savings or investments, from tax.

Shrewd and prompt ‘early bird’ use of these tax-breaks can help build and protect long-term wealth. So start building your nest now.

SAVE THOUSANDS USING YOUR ISA ALLOWANCE

ALL adults can put a maximum of £20,000 into an Isa in the tax year that ends on April 5, 2020.

Money can be invested in the stock market – through shares or funds held within the Isa wrapper – with all profits and income generated free of tax. Such an Isa is best managed through a fund platform offered by the likes of AJ Bell, Bestinvest (part of Tilney Wealth), Halifax, Hargreaves Lansdown and Interactive Investor.

Those unwilling to risk their capital can put money into an Isa-based savings account, typically offered by a bank or building society. All interest is tax-free. These cash-based Isas can be opened online, by post or in a high street branch.

The annual Isa allowance is not as generous as with a pension (£20,000 versus £40,000) and there is no tax boost on contributions. But Isas have the benefit of being flexible.

Withdrawals from an Isa can be made as and when required (unlike a private pension where access is not possible until age 55). There is also no tax due on withdrawals, again unlike a pension where most proceeds are taxed as income. Many people wait until the end of the tax year before using their Isa allowance. Jason Hollands, a director of Tilney Wealth, says: ‘In the tax year just gone, the last new Isa was opened on our website at 11.54pm on April 5, the last day of the tax year. The last Isa top-up by a client was at 11.57pm, three minutes before the £20,000 allowance for that year disappeared forever.’

Someone who adopts an ‘early bird’ rather than a ‘last minute’ approach to using their allowance is invariably better off. Some crude number crunching by Interactive Investor shows that someone who invests £20,000 at the start of each tax year for ten years would be more than £12,500 better off overall than a friend who waited until the last day of the tax year before investing the same sum – £264,136 versus £251,558, assuming investment growth of 5 per cent a year.

Most people will not be able to afford to make an early investment of £20,000. For them a better strategy is to invest on a regular basis – preferably by setting up a monthly direct debit so they can stand back and see their Isa fuelled by regular contributions. Someone wishing to use the full £20,000 allowance can invest £1,666 a month.

Hollands says: ‘Regular investing also reduces the risk of getting market timing wrong – for example, buying shares ahead of a stiff fall in equity prices.’

Below, some of the country’s leading investment experts reveal what investments they put their cash in.

IT’S NEVER TOO SOON TO PAY INTO A PENSION

THE start of the tax year gives most of us the opportunity over the next 12 months to put up to £40,000 into a pension fund with contributions boosted by tax relief.

Few of us are in a position to make full use of this allowance, while additional rate taxpayers are subject to a lower annual limit which falls in stages to £10,000, according to how much they earn.

Most employees save into a workplace pension, with contributions boosted by Government tax relief and an employer’s contribution.

Many are already saving more into a pension this month because of an increase to the minimum contribution rates in the recently introduced autoenrolment regime.

This requires employers to sign most workers up to a pension plan. This month, contribution rates have jumped, with employees providing 5 per cent of a slice of annual earnings (between £6,136 and £50,000) and employers 3 per cent.

Many firms allow staff to further increase monthly pension payments, some boosting the amount they put into the employee’s pot. If so it is worth exploring this option with your company. For the selfemployed, cashflow issues can make regular payments into a pension galling.

As a result, Patrick Connolly, a chartered financial planner with Chase de Vere, says it may make sense to wait until near the end of the tax year before deciding how much they can afford to lock away inside a pension.

EARLY TO BED, EARLY TO RISE ON TAX BREAKS

THE new tax year brings a new capital gains tax allowance. Now up to £12,000 of profits resulting from any share or fund sales outside an Isa or pension are exempt from tax. Above this, gains are taxed at either 10 per cent (for basic rate taxpayers) or 20 per cent (for higher rate or additional rate taxpayers).

For some, it will make sense to ‘bed and Isa’ some investments, selling shares within the £12,000 capital gains tax allowance, then buying them back inside an Isa, sheltering them from further tax.

Laura Suter, of AJ Bell, says anyone with dividend-friendly shares should also consider the bed and Isa approach. Currently, only £2,000 of annual dividend income escapes tax. Above this they are liable to tax at 7.5 per cent (for basic rate taxpayers), 32.5 per cent (for higher rate taxpayers) and 38.1 per cent (for additional rate taxpayers). Inside an Isa this income would be tax free.

Anyone likely to jump up a tax bracket this tax year and who has cash savings outside an Isa should note that the tax-free annual personal savings allowance on interest falls from £1,000 for basic rate taxpayers to £500 for higher rate taxpayers – and to zero for additional rate taxpayers. Any savings may be better deployed inside an Isa.