Savers and investors have each been handed a fresh ISA allowance of £20,000 as the start of the new tax year begins.
While many people wait until the last minute to use their ISA allowance, broadly speaking the earlier you use your ISA allowance in the tax year the more opportunity you have to benefit from returns, and to save on tax. In an Investment ISA, you won’t pay tax dividend tax or capital gains tax, which means your money can grow without any tax bills accruing.
Whether you have a lump sum to invest or plan to add to your ISA monthly in this new tax year, we look at 2 ways our customers go about using their ISA allowances:
The lump sum investor
You might have just received your annual bonus from work, a financial gift from a family member, some inheritance, sold a small business or received some other kind of windfall. If this is you and your finances allow – in other words if the money isn’t needed to pay off debts or to build a savings buffer – you might be considering using this money to fill up your ISA.
One of the benefits of being a so-called early bird ISA investor and investing the money straight away, is that your money is put straight to work and you get exposure to stock markets sooner. This means that you could benefit from higher returns over the long term by gaining up to a whole year of dividends and potential market growth.
The risk of investing a lump sum is that you invest right before a downturn and the value of your investment immediately drops. However, this is only a loss on paper and history shows that markets have always recovered from shocks. As long as you’re in it for the longer term – at least five years or more – then there’s time for recovery.
To invest a lump sum simply fund your Smart Investor ISA with the money and make your one-off investment selection.
The Pay-as-you-go investor
For those who are building a portfolio without a lump sum, you can set up regular monthly payments into a stocks and shares ISA each month, and automatically spread your investments across the tax year.
Even if you have a lump sum you might worry that you're committing too much money all at once – especially if markets are a little unsettled. So you might choose to invest chunks of this money monthly and drip feed your money into the stock market.
How Smart Investor helped Alison
“I’ve got a Direct Debit set up, so money goes into my ISA every month and I’m only investing money I won’t need for my day-to-day. I’ve not put a large amount in any one stock – I’ve invested small stakes in each to ensure my money is spread around as I don’t want to take too much risk. I’m just trying to build up my savings and grow my money for the future.”
There are a number of benefits of investing regularly. It means that you don't have to spend time wondering if you are buying at the right or the wrong time as you would if you were investing a large lump sum. And like with Alison, contributing smaller amounts can be a good way of getting into the investing habit so that you can meet your long-term savings goals.
Graham likes the flexibility of a direct debit.
“I’m currently investing £500 a month by Direct Debit but once we’ve finished refurbishing our new home, I’ll increase the amount I put away and make sure I use my full ISA allowance.”
Pound Cost Averaging
By gradually adding to your investment ISA you buy shares at 12 different prices throughout the year – a tactic known as Pound Cost Averaging. When the share price falls you can buy more shares at cheaper prices. Your buying power drops when prices rise when you buy shares and funds when they are expensive and buy fewer shares. The idea is that by investing across a range of prices your averaged out price will smooth out the impact of any extremes in market volatility.
One of the biggest misconceptions about investing is that you need to have a large amount to be an investor. But in actual fact, you can invest from as little as £50 a month, or if you want to max it out some investors will choose to put away £1,666 a month to hit the £20,000 limit over 12 months.
Find out more about setting up a regular investment.
Which works best?
Clare Francis, Savings and Investments Director, explains: “There’s no one-size-fits-all answer to what’s best – lump sum investing or regular investing. The right one will be what suits your personal finances and circumstances, affordability and your appetite for risk.
“Investors who invest earlier in the tax year might reach their financial goals sooner than if they delay – many customers fill their ISAs last minute, right before the deadline and miss out on many months of potential growth.
“If you're keen to begin investing in this new tax year 2025/26 but you don't have a lump sum available, monthly investment plans can help you get started. You can set up a regular investment with Barclays Smart Investor with less than you think and increase the monthly payments as and when you see fit.”
Benefits of an early-bird ISA investor
The benefit of investing early is not timing, it’s time. It simply means you have your money in the market for longer. The longer you’re prepared to stay invested, the greater the chance your investments will yield positive returns.
As long as you are patient and have plenty of time before you need to tap into your investments, you should benefit from the snowball effect of compound growth as the years roll by whether you’re a Lump sum or a Pay-as-you-go investor.
