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Stocks & Shares ISA – simple, tax-free investing

14–17 minutes to read

A Stocks and Shares ISA allows you to invest your cash in companies, funds and even commodities. It is a completely different beast from the traditional Cash ISA.

Many see stocks and shares as a way to provide greater returns versus more traditional cash savings products. However, investing is considered a much higher risk. We’ve all seen the financial disclaimers that state stocks can go down and you may end up with less money than you invested.

Contrary to popular memes, stocks don’t always go up!

Saying that, the prospect of making higher returns through investing is attractive for many.

Opening a Stocks and Shares ISA will allow you to invest your cash without having to worry about tax. If you are investing, it’s usually the first account you should consider. But beware, make sure you understand investing before yolo’ing your life savings down the drain.

In this article, we will cover everything you need to know about Stocks and Shares ISAs. We’ll also give you pointers and links to help you learn more about investing so you know the risks and don’t fall for the common mistakes.

Want to know everything about ISAs and the other types available? Check out our Ultimate ISA Guide To Powerful Tax-Free Savings.

What is a Stocks and Shares ISA?

A Stocks and Shares ISA allows you to invest your cash in companies, funds or commodities, inside a tax-free wrapper.

This means any gains you make from this account won’t incur any tax. Furthermore, you won’t need to add it to your self-assessment which means less paperwork for you to do each year.

The alternative is a General Investment Account (GIA) where your gains may be subject to income tax and capital gains tax.

You can put up to £20,000 per year into a combination of ISAs. Unless you have already used this generous allowance then a Stocks and Shares ISA would usually be the first choice over a GIA.

There are some restrictions so make sure you read on to understand them fully.

Heads up – We aim to produce honest and accurate content, however, we are not financial advisors. If you need financial advice, Unbiased can connect you with a suitable professional for free. Some of our links may earn us a small commission to help us run the site.

Should I open a Stocks and Shares ISA?

If you are considering investing then a Stocks and Shares ISA is usually the account of choice for most of us.

Wrapping your cash or stocks and shares investments in an ISA means your money is sheltered from any future tax. For investors, this means if you pick the next Amazon or Tesla then ALL the profit you make will be yours to keep. Doing this outside an ISA would mean you’ll have to give some of your gains back to the Government.

Ultimately the question is whether investing is for you. This is a personal decision and comes down to your attitude towards risk and reward.

Due to the nature of investing, you should look at this as a minimum five-year time frame. This should be long enough to ride out some of the inevitable bumps along the way. This means you should be prepared to not touch this cash for five years.

Investing isn’t for everyone. Some people find it stressful or are not comfortable with the risks. That’s fine, don’t risk your hard-earned money if you don’t feel it’s worth it. Check out our easy to follow Beginners Guide to Investing or our How to become a millionaire the surprisingly easy way to learn more about investing.

What can I invest in with a Stocks and Shares ISA?

The world is your oyster, there’s plenty to choose from. Most platforms offer the following investments however some providers are more restrictive:

  • individual stocks and shares
  • index-linked funds
  • unit trusts
  • investment trusts
  • corporate/government bonds
  • exchange-traded funds

This definitely adds a different dynamic and introduces a degree of complexity, which means research is crucial. It’s important you are comfortable with what you are getting into.

You can have complete control over what you invest in. But to help make investing accessible and easy to newcomers, many platforms offer assistance. The degree of help can be thought of in three categories:

  • Do it yourself – you are in complete control of what you invest in and are responsible for balancing your portfolio. These platforms are best suited for those who know what they are doing. Examples include Fidelity, Hargreaves Lansdown and Interactive Investor.
  • Do it with me – these platforms offer a bit more help and may guide you towards certain funds. There is usually some information available to help you assess your options. Ultimately, you still get to pick and make the decisions. Check out AJ Bell and Vanguard which are both popular platforms.
  • Do it for me – ideal platforms for beginners. They often ask you a series of questions to qualify factors such as your budget and appetite for risk. Based on your responses, they then recommend particular investment portfolios. Both Wealthify and Nutmeg are seeing an increase in their popularity as they make it so easy.

There are also some platforms that offer free shares or cash rewards as an incentive, you can find out more here: How to get free stocks in the UK – Worth up to £705!

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Stocks and Shares ISA charges

Charges associated with investing can make a huge impact on the value of your pot over the long term. Even though charges might seem small, lots of small charges eat into your gains or amplify your losses, particularly as your funds grow into significant sums.

The more money you have, the more important keeping your charges under control becomes.

Charges are an important consideration when picking your platform as each company has a slightly different model. There are a number of different charging mechanisms that make up the cost of investing. These are:

Platform fees

The platform you choose to invest through (i.e. Hargreaves Lansdown, Fidelity etc) will usually charge a fee for holding your funds. This is unlike a savings account where your money is held free of charge. Platform charges vary from a fixed fee to a percentage per year of the value of your account.

Fund fees

Once you’ve selected your platform, you may choose to invest in funds. Those funds usually levy a fee for investing with them. This covers the running costs of the fund. Fund fees are deducted if the fund goes up or down and are usually a percentage of your investment in the fund. Fees can range anywhere from 0.1% to 1%+.

Selling/buying fees

There is usually a charge ranging between £0 and £15 every time you buy or sell a fund or stock. Some platforms offer fee-free trading like Freetrade or Trading 212 and some include a number of free trades per month like Interactive Investor. If you plan on buying/selling regularly, these can soon add up, so look for a low or fixed rate fee.

Transfer out fee

You should review your platforms costs each year and gauge them against the competition. You can move your Stocks and Shares ISA between platforms if you find a better fit. Just be aware, that doing so can carry a fee that should be calculated for. Some platforms don’t charge anything like Hargreaves Lansdown. Others charge based on the number of funds you are invested in, which could add up.

It’s important to know the charges for all of these aspects when comparing or opening new Stocks and Shares ISA. The ‘art’ comes in knowing that while some platform fees may be more expensive, the fund fees or other charges within them are significantly less, making them cheaper overall.

Here’s our guide on How to Choose the Best Investment Platform for you which will walk you through all the considerations including charges.

What is the benefit of a Stocks and Shares ISA?

You can invest outside of an ISA, however, you will be taxed on the earnings that you make. How much you invest is limitless, however.

The benefit of investing within a Stocks and Shares ISA is that you don’t pay tax on the profits or earnings.

That means more money in your back pocket. Furthermore, it makes things simple by not having to declare anything to the Tax Man.

The catch is that you can only invest up to £20,000 per tax year, which to be fair is sufficient for the majority of people.

For most of us, the £20,000 allowance is more than enough to cover our investing needs but if you were to exceed this amount then you would need to invest outside of your ISA wrapper.

You might think that you won’t make that much profit on your investments so you don’t need to worry. However, investing, even small amounts, over time can have dramatic effects as shown in our How to become a Millionaire the surprisingly easy way article. It’s a good idea to have this money wrapped up now as we don’t know what might happen in future.

Do I pay tax on a Stocks and Shares ISA?

By wrapping your investments in a Stocks and Shares ISA, you are now exempt from having to pay the normal taxes that would apply:

  • Capital Gains Tax (CGT) – you do not need to pay tax on any profit you make from selling any investments. This is particularly useful if you already exceed your £12,000 annual CGT allowance. It works both ways though; neither can you use losses to offset against any CGT you incur from other investments.
  • Dividends – any dividends you earn from your investments are tax-free and do not affect your personal £2,000 tax-free Dividend Allowance.
  • Corporate Bonds – are also tax-free when inside a Stocks and Shares ISA.
  • Property Rental – you may have invested in property funds as part of your portfolio diversification. Any rental collected is tax-free when your investment is inside a Stocks and Shares ISA.

So for most people, a Stocks and Shares ISA is not only highly tax-efficient but also makes it hassle-free. This is particularly useful if you have to submit an annual tax return as you don’t need to declare anything within the wrapper.

Further to this, you still have your other tax breaks available. This means you could still make £12,000 of profit under Capital Gains Tax and make £2,000 in dividends each year. Each of our tax positions is different so be sure to check your personal circumstances first.

Want to Calculate YOUR tax savings? Try this Calculator from Hargreaves Lansdown.

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What is the best performing Stocks and Shares ISA?

We get this question a lot. It usually comes from the person asking not really understanding what a Stocks and Shares ISAs actually is. And that’s cool. There was a time when we didn’t either, and we’re ‘normal people’ (whatever that means). In fact, it’s one of the reasons that inspired us to write this guide.

A Stocks and Shares ISA is just a tax-free wrapper with a £20,000 annual limit. What you invest in within that ISA could be anything from high-risk volatile stocks, emerging markets funds, to safer yet lower-yield Government bonds.

The point is that what you invest in is highly personal. As a result, the performance will depend on those choices you make and will vary hugely from person to person even if they have the same platform provider.

Choosing a provider for your Stocks and Shares ISA and choosing what you invest in are two independent choices. Some platforms do restrict your investment choices to make things easier, particularly for those starting out.

Are Stocks and Shares ISAs safe?

The good news is that Stocks and Shares ISAs (unlike Innovative Finance ISAs) are protected by the FSCS (Financial Services Compensation Scheme).

The not-so-good news is that because Stocks and Shares ISAs are seen as investments, you are only protected up to £50,000. At least with a Cash ISA, they will protect you to £85,000.

Remember, FSCS protection is per individual per financial institution. So if you have over the limit with one provider even across multiple products, then you are at risk.

Crucially, this ‘protection’ is against the financial institute you invest through. If it goes bust your money is protected. It does not protect you against losses your investments make.

Think of this as insurance against your platform provider hitting financial troubles. Your investment choices are YOUR responsibility. If they go down, that’s on you and there is no recourse. That’s all part of the risk, or ‘fun’ of investing. To learn more check out our Beginners Guide to Investing to make sure you don’t make the same mistakes I did.

To find out which ISAs are covered by the FSCS, check out the ‘ISAs at a Glance’ table in our Complete ISA Guide.

Is a Stocks and Shares ISA better than a Cash ISA?

It’s important to understand that a Stocks and Shares ISA is vastly different from a Cash ISA and they are typically used for different things.

A Cash ISA is really just a savings account where the amount of interest you make is tax-free. They are generally considered low risk and low return. This means your money is fairly safe, but you’re not going to make a whole lot back.

On the other hand, a Stocks and Shares ISA allows you to invest your cash. And like any investments, they can go up as well as down, In fact, you could lose your entire capital (the money you put in originally).

Stocks and Shares ISAs are generally considered higher risk than a Cash ISA, depending on what you invest in. However, over the long term, investments have generally provided greater returns. But the past is not an indication of future performance. This is what you must weigh up, is the increased risk worth the potential reward and I say potential on purpose. There are plenty of investors who have lost money. So, if you don’t like risk, stick to a Cash ISA.

A technique used by many is to grow their Stocks and Shares ISA investments over 5, 10 or 20 plus years. Then as they approach retirement, they transfer their funds to a Cash ISA in order to de-risk.

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Can I have a Cash ISA and Stocks and Shares ISA?

Yes, you can have different ISA types open at the same time and pay into them all during a single tax year.

Remember that your annual £20,000 ISA allowance applies to all of your ISAs. So if you have paid £10,000 into your Cash ISA this year, you only have a maximum of £10,000 left for your Stocks and Shares (or other types of) ISA this tax year.

You can also have multiple of the same type of ISA, as long as you only pay into one each year. However to keep things easy to manage and to ensure you don’t fall foul to the rule you may want to consider transferring ISAs between providers to ensure you only have one of each type open.

Finally, if you do transfer an ISA during a financial year, you can still contribute to the new provider as long as you follow the correct transfer process.

This can all get a little confusing and everyone’s situation is different. If you’re not sure please feel free to join our FREE UK Personal Finance Club where you can ask questions and learn from other like-minded people. We’d love to see you there.

Can I invest in two Stocks and Shares ISAs?

No, not in the same tax year.

You can have more than one Stocks and Shares ISA open, but you may only pay into one of those each tax year.

The only exception is if you transfer between providers following the correct transfer process. This would effectively shut down your old provider’s account, transfer your money across to the new provider and then allow you to contribute.

What’s next?

Interested in Investing? Here’s a list of articles to get your investing journey started:

You may be keen to get started but reading these articles will ensure you educate yourself so you don’t fall into the common traps beginners do. I hope you enjoy them.

And finally, if you want a little kick start to your investing journey then check out our article on How to get free stocks in the UK – Worth up to £705!

Stocks and Shares ISAs - Final thoughts

A Stocks and Shares ISA is one of the cornerstones to building Financial Independence. Wrapping your investments in an ISA ensures you don’t give away any of the profit you might make. This means your money will grow faster.

Investing does carry risk so before you start ensure you have paid off debt, you have a solid budget and you have an Emergency Fund. If you are new to investing then please read the articles mentioned above they should help you avoid the same mistakes I’ve made over the years.

Additionally, for those who want to learn more or want help from other like-minded people, please join our FREE UK Personal Finance Club. It’s a closed group designed to be a safe space to ask any questions you might have. We’d love to see you there.

Here’s to Financial Fitness

EatSleepMoney.co.uk does not offer financial advice and is intended for reference/information only. Remember, you should always carry out your own research and/or take specific professional advice before choosing any financial products or services or undertaking any business or financial venture. If you need financial advice Unbiased can connect you with a suitable professional for free. Investments may go up as well as down and you may get back less than you put in.