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.
An investment ISA is a tax-free way of investing your savings in the stock market. It's sometimes called a stocks and shares ISA.
Unlike a cash ISA, there's no guarantee your money will earn interest. And you might actually lose money if the stocks you've invested in go down in value. But if the stock market goes up, you can earn much more than the interest from a simple cash ISA. You cannot lose more money than you put in.
Many investment ISAs lost value in 2018 because stock markets were unstable. Now that the markets have stabilised, many investment ISAs are showing significant gains again.
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 put up to £20,000 per year into an ISA without paying tax on any interest you earn. If you put money into an ISA every year, you could eventually earn a lot of tax-free income every year.
It's good to compare stocks and shares ISAs as stocks and shares ISAs are better for long term savings (or investments) of at least 5 years. When you withdraw money from your investment ISA, you'll only be able to reinvest it if it's within your ISA allowance. So, if you'd 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.
Investment ISAs are not for the faint-hearted as they carry a fair amount of risk.
The main benefit of this kind of 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. Then again, it might not.
To get the most out of an investment ISA, you may need to lock away your money for more than a year. 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 ISAs every tax year. You can spread this between different types of ISAs, but you cannot open more than one cash ISA per tax year. The interest you earn in an ISA is tax-free.
But thanks to the personal savings allowance (PSA), an ISA is not the only way you can earn interest without paying tax on it.
The PSA allows basic rate taxpayers to earn up to £1,000 and higher rate taxpayers up £500 completely tax-free in a normal bank or savings account.
If you think you'll have to pay captial gains tax on your investments or dividends, an investment ISA could be good for you. The dividend (interest-free) allowance is £2,000.
For more information, read our in-depth stocks and shares ISA guide.
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