The 2016/17 tax year ended at 12 o’clock last night, which means if you’re putting money aside to save in an ISA, you’ve missed the deadline.
Luckily, ISA allowances refresh every tax year so while you may have missed last year’s decline, the countdown to the end of the 2017/18 tax year has only just started.
It’s never too late to start saving and investing. With 12 months now left until the end of this tax year, you’ve got plenty of time to make use of the new, larger ISA allowance. Indeed, for this tax year, the allowance has been increased to £20,000, up from last year’s limit of £15,240. So, if you have money left over you didn’t manage to get into last year’s allowance, there’s plenty of additional room this time round.
Create a long-term plan
Having a long-term savings plan is key to wealth creation, and a plan is even more important when trying to take advantage of a yearly product such as an ISA. Most people leave contributions to the last minute, which is fraught with risk. What happens if there is a delay in processing your bank transfer? Or what happens if you have to foot the bill for an unexpected, unforeseen expense? If you find yourself rushing to meet the ISA deadline every year, you could be placing unnecessary stress on yourself and your wealth.
And missing out on your ISA allowance can cost thousands. For example, let’s say a higher rate taxpayer invests £10,000 in a share yielding 5%, assuming this investor has already used up their tax-free dividend allowance, the tax on dividend income will be £162.50 per year or £1,625 over 10 years. This might not seem like much in the grand scheme of things, but such missed opportunities add up. What’s more, having to shell out an additional £162.50 per year to the taxman just because of a lack of planning seems like a complete waste of money.
Making the most of the allowance
Starting a savings plan as early as possible is key to making the most of an ISA allowance. Most providers offer a regular investment plan allowing you to invest in companies such as GlaxoSmithKline (LSE: GSK) on a monthly basis.
Glaxo is the perfect stock for regular ISA investing. As one of the world’s largest pharmaceutical companies the business is highly defensive and Glaxo pays a quarterly dividend to shareholders, which at present works out at an annual rate of 4.8%. The payout is covered around 1.4 times by earnings per share.
Glaxo’s dividend isn’t its only attractive quality. As a pharmaceutical company, its earnings are relatively stable and are set to grow in line with the world’s ever-expanding population. The population is getting older and wealthier, two trends that are advantageous for Glaxo’s earnings as the company can sell more products at higher prices.
After the firm’s recent restructuring, earnings growth has taken off with earnings per share up 35% last year, and growth of 8% pencilled-in for 2017. The shares currently trade at a forward PE of 14.9, which is not overly expensive for such a defensive high-yield stock.
So overall, now is the time to start investing your ISA allowance for this year and Glaxo could be the perfect place to start.