The Individual Savings Account (ISA) is celebrating its 25th birthday as the new tax year ticks over, to the cheers of investment analysts across Britain.
Myron Jobson, senior personal finance analyst at interactive investor, said: “ISAs are one of the UK’s biggest success stories, with around 22 million adults in the UK holding savings and investments in an ISA, valued at approximately £741.6 billion.
“While few have been in the fortunate position to make full use of the annual allowance every tax year, many have benefited from the simple, transparent and easy to understand tax wrapper.”
Jobson said that it doesn’t take an investment guru to reap the benefits of ISAs’ tax benefits; even a “middle of the pack global fund or investment trust would have yielded over 2.5 times the total invested amount over the period”.
The annual ISA allowance is currently pegged at £20,000, with all capital gains and dividends from investments made within this threshold-free of tax.
Dan Coatsworth, an investment analyst at AJ Bell, decided to use a few real-world examples of what an early ISA investor would have made since the product’s 1999 debut.
“Four giants of industry were created in the same year as the ISA launched in 1999 and investing in them at the first possible opportunity via this tax wrapper would have turned £5,000 in each stock into a combined £648,660,” said Coastworth.
Those companies being:
- AstraZeneca: Founded on 6 April 1999; a merger between Zeneca and Astra, resulting in a total return of 744%
- BAE Systems: Established on 30 November 1999 through the acquisition of Marconi Electronic Systems by British Aerospace; total return of 925%
- ExxonMobil: Formed on 30 November 1999 by merging Exxon and Mobil; total return of 514%
- Salesforce: Founded in February 1999 and went public on 23 June 2004; total return of 7,022%
The total returns were calculated considering share price changes and dividends, using the latest data up to 26 March 2024.
Coatsworth stated: “All capital gains and income have been sheltered from the taxman in this scenario, meaning investors lucky enough to hold these stocks would have been able to keep all the rewards.”
Don’t delay, open an ISA today
“ISA early birds get the returns,” said Sarah Coles, head of personal finance at Hargreaves Lansdown.
She added: “The earlier you use your ISA allowance in the tax year, the better, because your investments have longer to grow, and are protected from tax straight away.
“Over the past ten years, investing on the first day of the tax year could have left you £38,000 better off.”
With that being said, few individual investors are able to take advantage of the £20,000 tax-free threshold; even fewer will be able to benefit from the ‘Great British ISA’ announced in Chancellor Jeremy Hunt’s Spring Budget.
The Chancellor announced a £5,000 increase in ISA allowances restricted to UK-listed stocks only, bringing the yearly tax-free allowance for the ISA tax wrapper up to £25,000 per year.
He positioned this increased ISA allowance as a way of bolstering investment in UK companies, but while most analysts welcomed the move, others (in this case Michael Summersgill, chief executive at AJ Bell) called it an “ill-conceived, politically motivated decision (that) will simply not achieve that objective”.
