Stock market

Investing early in a Stocks and Shares ISA can reap huge rewards! Here’s why

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We’re big fans of stocks and shares ISAs here. The Motley Fool. These products protect investors from paying tax on any capital gains and dividends they enjoy. A £20,000 annual allowance is also more than enough for most UK investors.

Investors can use this £20,000 during the tax year. But those who use it early can reap huge rewards, according to Sarah Coles, head of personal finance. Hargreaves Lansdowne.

Tax benefits

The sooner investors get their money, the better. But there are other benefits to investing early in a stocks and shares ISA.

Coles says:As a general rule, the earlier you use your ISA allowance in the tax year, the greater your chance of saving tax, and it’s particularly valuable to enroll as early as possible in the year.

Halving the dividend tax allowance to £500 means that share owners are at risk of paying tax on cash payments earlier in the year.

A £3,000 reduction in capital gains tax allowance also puts investors at risk of writing bigger checks to the taxman. Coles notes that “Switching to 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 within a tax wrapper – involves costs and some hassle. But the tax benefits often make it a worthwhile exercise.

Please note that tax treatment depends on the individual circumstances of each client and may change in the future. The content in this article is provided for informational purposes only. It is not intended to be, nor does it constitute, any tax advice.

Millionaire tricks

As I say, the sooner investors start using their annual ISA allowance, the longer it will take for their money to grow. By compounding their profits through capital gains and dividend reinvestment, they have a real opportunity to supercharge their long-term wealth.

A quick look at the investment habits of ISA millionaires shows the huge rewards that can be reaped from buying shares early.

Hargreaves Lansdown says 30% of millionaires on its books use their full allowance in the first month of the tax year. Overall, 54% used their annual allowance within three months of the start of the new tax year.

A top FTSE 100 share

I’m making a list of shares for my ISA over the next few weeks. is one of them. M&G (LSE:MNG), one of many. FTSE 100 I think the stock is undervalued at current prices.

Today, the financial services provider trades at a forward price-to-earnings (P/E) ratio of 9.9 times. It also boasts an impressive 9.1% dividend yield.

M&G’s downgrade reflects that profits are likely to fall amid a struggling UK economy. But as someone who invests for the long haul, I’m happy to tolerate some near-term turbulence. And I think the ultimate benefits of owning that share can be substantial.

As the UK’s aging population continues to grow rapidly, M&G is well placed to grow sales of its savings and investment products. But that’s not all. It has sufficient balance sheet strength (with a Solvency II ratio of 203%) to help it make the most of this opportunity.

And of course, that strong capital base gives it room to continue paying out huge dividends. On balance, I think buying M&G shares early can deliver fantastic rewards.

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