To encourage savings and investment, the government allows a number of tax-free investment options. The Individual Savings Account (ISA) is one of these. An ISA is not an investment in its own right, it’s a tax wrapper that you put around an investment, which in effect shields it from some or all of the tax that would normally be due.
- Individual shares or bonds, or
- Collective investments, which can be made up of a combination of stocks and shares, bonds, or commercial property, or a mixture of these.
How much can I invest in a stocks and shares ISA?
Your annual allowance for a stocks and shares ISA is £10,680, but you can only invest with one provider in a single tax year. Investing this amount would use up your full ISA allowance. If you’d rather split your allowance between a cash ISA and a stocks and shares ISA, you can choose to invest up to 50% of your ISA allowance in a cash ISA – you can invest less than this in cash, but not more – and the remaining balance can be invested in stocks and shares.
Any gains you make on your investment are not counted as part of your stocks and shares ISA allowance, so for example, if you invested 50% of your ISA allowance and it went up in value, you would still be able to invest the other 50% before the end of the tax year if you wished – the gains you made would not reduce the overall amount you can invest.
If you sell any shares in your stocks and shares ISA, the proceeds can be reinvested within the ISA and will not count towards your annual allowance either.
You can switch your investments within the stocks and shares ISA or transfer it to another provider without it affecting your allowance too, as long as the proceeds of any sale are not withdrawn. If you withdraw any cash from the ISA wrapper, you can’t reinvest it within the ISA again, unless it is as part of your annual ISA allowance.
You also need to be aware that while you can move money from a cash ISA into a stocks and shares ISA, you can’t move your funds the other way round.
Is a stocks and shares ISA tax-efficient?
You don’t have to pay any Income Tax or Capital Gains Tax on the growth of the investments in a stocks and shares ISA, as long as you keep the investments within an ISA. But the tax advantages will depend on your personal tax position.
Buying share-based investments through ISAs will only save you tax if you’re a higher-rate taxpayer, or are likely to pay Capital Gains Tax.
If you’re a basic rate taxpayer dividends receive the same tax treatment regardless of whether they’re in an ISA or not, with the 10% tax credit being applied. If you’re a higher rate taxpayer though, you will have a tax advantage because you don’t have to pay the additional 22.5% that would normally be due on dividends.
If, however, you buy a stocks and shares ISA where the underlying investment pays interest – such as corporate bonds – then the interest will be tax-free regardless of the tax band you fall into. Find out more about investment and tax.
Is a stocks and shares ISA the right investment for me?
A stocks and shares ISA does have the potential to deliver higher returns than a cash ISA, especially over the medium to long-term, but you need to bear in mind that it doesn’t provide the security and easy access of a cash ISA. As a starting point, you need to consider your investment objectives and your attitude to risk to work out whether or not a stocks and shares ISA is suitable investment choice for you.
If your investment is to provide short-term savings, for instance to pay for a holiday, or if you need to be certain that you’ll get your capital back, such as when you’re saving for a deposit on a house, then a stocks and shares ISA probably isn’t suitable for you. Stock market investments need to be viewed as a medium to long-term investment – at least five years – in order to ride out the ups and downs of the market, and you need to be prepared to take a risk.
How can I minimise the risk of a stocks and shares ISA?
There are, however, many different funds available, and these vary according to their level of risk and the potential returns. This means, if you’ve decided that you are prepared to take a risk, you can match your ISA choice to the level of risk you’re prepared to take. You can also diversify to spread your risk, or choose a collective investment.
Stocks and shares ISA investments don’t have to be limited to shares either. Many collective funds invest in bonds and gilts, and even commercial property, giving you a number of options to choose from. It’s also possible to choose a fund according to your ethical or environmental beliefs. Find out more about investing and risk.