An investment ISA (also known as a stocks and shares ISA) allows you to buy, hold and sell investments. With an investment ISA, all capital gains and income made from your investments won’t be taxed, as long as you remain within your tax year allowance.
Investment ISAs put your capital at risk, and you may get back less than you originally invested.
Last edited: 14 September 2021
An Investment ISA (also known as a Stocks and Shares ISA) can help you invest and grow your money. It can also protect your savings from tax. ISAs, also known as Individual Savings Accounts, are a tax-efficient way to buy, hold or sell investments like shares, bonds and funds. Find the best Investment ISA and make the most of your £20,000 ISA Allowance for 2021-2022.
An ISA is a savings account that protects your money from tax and enables it to grow tax-free. If you are aged over 18 and resident in the UK you can invest in an Individual Savings Account. Every adult has a £20,000 ISA Allowance which runs from the start of the tax year on April 6 to the following year.
A Stocks & Shares ISA, or Investment ISA, enables you to buy stockmarket investments like equities, shares, bonds and funds. It is different from a Cash ISA, which is a straightforward cash savings account with tax protection.
A Cash ISA is much more straightforward and interest is added each month to the account. An Investment ISA invests in the stockmarket where the value of your funds can rise and fall along with the fortunes of the stockmarket. Investment ISAs have the potential to grow your money over time and protect your savings from the effects of inflation, but they do carry more risk than cash. On the other hand, keeping all of your money in a simple cash savings accounts means it will not have the opportunity to grow and help you build up a fund for the medium term or your retirement.
You can put up to £20,000 a year into an ISA without paying tax on any interest you earn. If you put your full allowance of money into an ISA every year, you could eventually earn a lot of tax-free income every year. The tax year runs from April 6 each year to the following April. The ISA allowance for the 2021-22 financial year (known as the tax year) is £20,000, which is unchanged from the 2020 to 2021 tax year.
If you do not use up the whole of your annual £20,000 ISA allowance in one tax year you cannot carry it forward to the next tax year. However, once the new tax year starts you have another £20,000 of money you can invest.
It is good to compare stocks and shares ISAs so you can find the right type of ISA for you. Investment (stocks and shares) ISAs are better for long term savings (or investments) of at least five years.
Investment ISAs are a good way to build up long term investment funds. With an investment ISA, all capital gains and income made from your investments won’t be taxed, as long as you remain within your tax year allowance.
A Stocks & Shares ISA can help you earn better returns on your money over the long term, and potentially protect your investments from the effects of inflation. However, the value of investments can go up or down, so your returns are not guaranteed.
Unlike a Cash ISA, you will most likely have to pay a fee to a broker or platform to hold and manage your Investment ISA. Finding the most competitive deal for an Investment ISA is very important because you want to make sure as much of your money as possible is going into your Investment ISA.
Some Investment ISAs have a minimum monthly amount that you need to contribute each month, or a minimum lump sum. This can range from £10 to £50 a month. By investing regularly you can ride out some of the ups and downs of the market, instead of trying to time the best point at which to invest via a lump sum.
An Investment ISA is a tax-free way of investing your savings in the stock market. It is designed to hold shares, funds and bond investments. Unlike a Cash ISA, there is no guarantee your money will earn interest. Instead, you buy shares in order to benefit from any increase in value or any payments in the form of dividends.
A Cash ISA or Individual Savings Account is a simple savings account that pays interest on your money. You will not lose any of your original investment, but with interest rates at very low levels currently, you will not make much money either. However, it can be a place to keep money you might need in the short to medium term as there is no risk to your original capital.
An Investment ISA protects your growing money from Capital Gains Tax, which is a tax you pay when you sell an asset that has risen in value. It also protects your money from Income Tax, which is a tax paid on the money or interest that your investments generate. You won't pay tax on any dividends (cash payouts by companies) that are made to your Investment ISA account either. One real advantage of ISAs is that the government cannot retrospectively claim back tax from your ISA account, even if they change the rules on how much you can save in the future or how much tax relief you will receive. So your Investment ISA is a very effective tax wrapper to help your money grow.
Holding shares is more risky than holding cash, but offers the opportunity for greater growth over the long term. If the stock market goes up, you can earn much more than the interest from a simple Cash ISA. If the value of the stocks you own falls, you will lose money. Therefore it is important to buy and hold investments for the long term and try to ride out any dips, rather than selling out if your shares falls. With shares, you cannot lose more money than you put in.
For example, if you are saving up for a house deposit you do not want to risk your savings and capital or find your investment has gone down in value just before you are about to buy your new property. Therefore a best buy savings account or Cash Isa might be a better option for you in these circumstances.
Many Investment ISAs lost value in 2020 because stock markets were unstable due to the uncertainty around Covid-19 and the worldwide effects of coronavirus. Now that the markets have stabilised, and have in many cases rebounded, many Investment ISAs are showing significant gains again.
If you have spare money to invest and you want to focus on long term growth, then an Investment ISA could be a good option for you. Don't invest money that you cannot afford to lose, that you need for household essentials, or that you might need in a hurry. However, there are other ways to save for the long term, for example with your workplace pension or personal pension.
Pensions and ISAs are treated differently for tax purposes but both are a good way to save for the future. You could spread your risk by having both a pension and an ISA in order to maximise your tax allowances and protect your money from tax in the future.
When choosing an Investment ISA, look at how your money will be invested. Some Investment ISA providers give you almost full control while others decide how to invest your money for you. You can choose how much you want to be involved in picking shares for your Investment ISA.
If you want to spread your risk across a number of different shares, regions or assets, then you could choose a diversified investment fund and hold it within your Investment ISA wrapper. If you like to pick different stocks, you can buy individual companies and hold them within your Stocks & Shares ISA. Individual shares are more risky than funds with a large spread of investments.
An Investment ISA can help shield your money from tax and help you to grow a nest egg over the long term. Each year you can add to your ISA account to build up your savings - you need to use your allowance within the tax year or you will lose it for that year. Although you can withdraw money, it is best to view your ISA as a long term savings vehicle.
When you withdraw money from your Investment ISA, you will only be able to reinvest it if it is within your ISA allowance. So, if you had already invested the maximum amount (£20,000) and withdrew £2,000, you would not be able to reinvest that £2,000 within the same tax year. For this reason, it is better to keep your Investment ISA as a place for long term funds such as saving for retirement.
When you compare Investment ISAs you need to think about how long you want to invest your money for, how much risk you are prepared to take, and what savings goals you are trying to achieve.
An Investment ISA is a good idea if you are thinking of investing on a five-year time frame. If you will need your money within five years, you might be better to consider a less risky form of investment, like cash. This is particularly true if you cannot afford to lose any of your money, known as your capital.
The main benefit of an Investment ISA over a Cash ISA is you could earn more interest. The current average interest on Cash ISAs is between 1 and 2%. In previous years, some investment ISAs have gained more than 10% in a year.
The downside is that your investment can go down in value. For example, you put £10,000 in an investment ISA today but it might only be worth £9,000 next year. The year after, it could go back up to £10,500. Share prices can change and the stock market can go up and down, which is known as volatility. The more volatile your investments, the more their price is likely to fluctuate in value.
To get the most out of an Investment ISA, you may need to lock away your money for more than a year and preferably for five years. If you need to access your savings at short notice, or if you can’t afford to lose your investment, then you should consider stashing your savings somewhere safer.
Anyone with decent savings could benefit from taking the time to compare stocks and shares ISAs. But the people who could potentially save the most money in tax are higher rate taxpayers who would otherwise have to pay income tax or capital gains tax on their investments.
You must be comfortable locking your savings a while and with the potential risk involved, regardless of your tax bracket.
You can deposit a maximum of £20,000 in your ISAs every tax year. You can spread this between different types of ISAs, but you cannot open more than one of each type per tax year. So you could split the ISA Allowance between a Cash ISA and a Stocks & Shares ISA if you wished.
You can open up a new ISA with a new provider each tax year, or you can add money to your existing ISA. You can add up to £20,000 for each new tax year.
For more information, read our in-depth stocks and shares ISA guide.
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