3 clever reasons investing at the start of a new tax year could boost your wealth

As you may know, April sees the start of a new tax year. This is a significant event that has the potential to affect your finances, depending on what new rules come into effect. Yet despite this, many people overlook it.

Typically, people tend to invest or take action with their finances towards the end of a tax year, meaning that February and March are extremely busy. This is largely driven by fears that certain benefits, such as the ISA allowance, will be lost if it’s not used by the end of the tax year, as it cannot be rolled over into the next one.

If you tend to invest at the end of a tax year, you may inadvertently be damaging your wealth. Investing in April or May could expose your money to greater growth potential and allow it to enjoy more tax benefits – both of which could help to boost your wealth.

So, if you’re wondering: “Should I invest at the start of a new tax year?”, read on to discover three clever reasons why you may need to consider it.

1. It could increase your investment’s growth potential

Investing earlier in the tax year means that your money is invested for longer, which in turn could expose it to greater growth potential. This may help to boost your money’s long-term wealth. 

To demonstrate this, you may want to consider an article by Investor’s Chronicle, which provides food for thought. It used data from the MSCI World Index, which tracks the performance of a basket of companies across 23 developed markets.

It reveals that if you had invested £20,000 at the beginning of the tax year for 10 years leading up to April 2021, your investment would have been worth £356,353. If, however, you had invested at the end of each tax year it would have been worth £329,316 – a drop of £27,037. 

Please note, the calculations are for illustrative purposes only, and don’t consider the effects of charges on any investment. It also assumes that £20,000 was put into the ISA every year, even though the ISA allowance was lower in some years.

Even so, it illustrates that investing earlier in the tax year could be something you want to consider as it may help boost your money’s growth potential. Always remember though, past performance does not guarantee future performance.

2. Investing in an ISA could mean more tax-free cash to spend

As you can see, investing early in the tax year could help increase your money’s potential growth. That said, you may also be able to enjoy a higher level of growth potential in a much more tax-efficient way.

Investing in a Stocks and Shares ISA in April or May means that any growth your money enjoys will not typically be liable to Capital Gains Tax (CGT). This might be particularly attractive when you consider that the CGT annual exempt amount is set to drop significantly in 2023/24.

In April 2023 it reduces from £12,300 to £6,000, and it drops again to £3,000 in April 2024. Furthermore, any amount you then take from your Stocks and Shares ISA as income will typically be tax-free. 

Investing early in a Stocks and Shares ISA early not only means that your money could enjoy greater tax-efficient growth potential, but it also ensures you retain the annual exempt amount. This could then be used to reduce exposure to CGT if you have other assets which could be liable to the tax. 

In 2023/24, you can contribute up to £20,000 into a Stocks and Shares ISA. If you would like to learn more about the benefits of investing in a Stocks and Shares ISA earlier in the tax year, please read my blog about them.

3. Contributing early could boost your retirement lifestyle

A defined contribution pension (DC) – otherwise known as a money purchase pension scheme – is an investment as it holds a range of assets including stocks and shares. With this in mind, the above Investors Chronicle example demonstrates how contributing into your pension scheme earlier in the tax year could help increase its value over time.

This could be further enhanced by the tax relief pensions typically receive. As a 20% basic-rate taxpayer, every £100 you place into your pension costs you just £80 in 2023/24. If you’re a higher-rate taxpayer it will cost just £60, and additional-rate taxpayers may pay £55.

This means that the more you contribute, and the longer you contribute for, the greater the tax relief you receive. In other words, the government effectively puts more money into your pension, which could help to boost its value over time. 

As a result, you may be able to enjoy a better standard of living or finish work earlier.

Please remember that the level of contributions that receives tax relief is typically limited to your Annual Allowance. The good news is that in 2023/24 it increases to £60,000 or the amount you earn, whichever is the lower.

Get in touch

If you’re considering: “Should I invest at the start of a new tax year?” and would like to discuss why it may be the best policy for you, please email me. I can be contacted at a.douglass@grosvenorconsultancy.co.uk or by calling 01793 766 123. Alternatively, you can reach me on my mobile, which is 07525 177 046. 

Please note that while I offer high standards of service and ensure that any solution I recommend is right for you, I’m also a busy mum, so work Mondays and Tuesdays only.

Please note

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

Tax levels and reliefs could change and the availability of tax reliefs will depend on individual circumstances.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation, and regulation, which are subject to change in the future.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

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