Stocks and Shares ISAs
If you're a UK citizen aged 18 or above, you're entitled to a tax-free ISA allowance of £20,000 for the current tax year. Opting for a stocks and shares ISA means your gains are exempt from capital gains tax, and you won't incur any taxes on dividends earned. Find out more about what they are, how they work and where you can find some of the best providers.
What is a Stocks and Shares ISA?
A Stocks and Shares ISA (individual savings account), also known as an investment ISA, or an S&S ISA, is a tax-efficient savings and investment account available in the UK. They allow investors to invest in a wide range of assets such as shares, funds, investment trusts, and bonds, in a tax-efficient way. ISAs are sometimes referred to as tax ‘wrappers’ because the money you hold in them is sheltered from both Income Tax and Capital Gains Tax. Whilst they have the benefit of being tax efficient, their main drawback is they have an annual limit tax-free allowance of £20,000.
Where can I invest in a Stocks and Shares ISA?
There’s a wide range of financial institutions like banks, neobanks, and FinTechs where an investor can start their Stocks and Shares ISA. Many have different opening criteria, fees, and a minimum amount you can invest. This is the lowest amount of money an investor can add to their account, and use to buy things like shares within their investment ISA. In the UK, this generally ranges anywhere between £1-£50, but can even be as high as £500 or more with certain providers of certain accounts. We’ve created a comparison of investment platforms and information like their minimum deposits, so you can find this easily in one place.
How do Stocks and Shares ISAs work?
Here's a breakdown of what you need to know:
You can pay a total of £20,000 into an ISA every tax year (your ISA allowance).
You can divide your yearly ISA allowance across the four different types of ISAs: cash, Stocks and Shares, innovative finance, or lifetime. Although the maximum you can put into a lifetime ISA is £4,000 each tax year.
You can’t put money into the same type of ISA in the same tax year, for example, you can't invest in two different Stocks and Shares ISAs – you’d need to wait until the next tax year to put money into the second Stock and Shares ISA.
Your annual ISA allowance expires at the end of the tax year (5th April) and any unused allowance will be lost. It can’t be rolled over to the following year.
You can make a lump sum investment and/or regular contributions throughout the tax year.
Any increase in value of the investments in your Stocks and Shares ISA is free of Capital Gains Tax.
Most income from your Stocks and Shares ISA is also tax-free.
It’s worth shopping around to make sure you find an ISA that suits you. You can choose different providers for different ISA types, and you can move your ISA to another provider.
Why are Stocks and Shares ISAs so popular?
One of the primary attractions is the tax efficiency they offer. Returns on investments held within a Stocks and Shares ISA are tax-free, providing a way for individuals to grow their wealth without incurring capital gains tax or income tax on dividends.
Stocks and Shares ISAs provide a wide range of investment options, including stocks, bonds, funds, and financial assets. This flexibility allows investors to tailor their portfolios to their risk tolerance, financial goals, and investment preferences.
Historically, investments in the stock market have shown the potential for long-term growth, outpacing the rate of inflation. Stocks and Shares ISAs provide a vehicle for individuals to benefit from this growth potential while sheltering returns from taxation.
Investors can spread their risk across different assets within a Stocks and Shares ISA, reducing the impact of poor performance in any single investment. Diversification is a key strategy for managing risk and enhancing the potential for stable returns.
Stocks and Shares ISAs are widely available and can be opened with various financial institutions, making them accessible to a broad range of investors. This accessibility contributes to their popularity among both novice and experienced investors.
Investors have the option to reinvest dividends automatically within a Stocks and Shares ISA. This compound reinvestment can enhance long-term returns, as dividends are used to purchase additional shares, potentially leading to increased wealth over time.
Stocks and Shares ISAs can be used for retirement planning, allowing individuals to benefit from tax-efficient growth over the long term and potentially providing a source of income during retirement
What is tax efficiency?
No tax on your return on investment, such as if the value of the shares you hold increases.
No further tax to pay on any dividends or interest received. Subject to a dividend allowance.
No Capital Gains Tax (CGT), which may be relevant if you have used up your annual CGT allowance.
Can I easily access my money?
You can sell the holdings of your Stocks and Shares ISA at any time and there’s no minimum length of time you need to hold your investments. If you do cash in part of or all ISA, you can only reinvest this money into another ISA to the amount that you have left over in your ISA allowance. Also be sure to check any potential charges of a potential ISA provider, as these vary between financial institutions.
What are the costs of a Stocks and Shares ISA?
The potential charges associated with a Stocks and Shares ISA can vary depending on the provider and the specific features of the ISA itself. Here are some common charges to be aware of.
Assets under management (AuM)
Many investment funds within a Stocks and Shares ISA have an annual management charge, which is a fee for managing the fund. This charge is typically a percentage of the total assets under management in your portfolio.
The platform or provider hosting your Stocks and Shares ISA may charge a platform fee. This fee covers the costs of administering the account, providing access to investment options, and maintaining the platform. This can either be one-off, or monthly.
Some providers may charge a fee for buying and selling investments within your ISA. These dealing charges can vary based on the type and frequency of transactions.
Exit Fees: Certain providers may impose exit fees if you decide to transfer or close your Stocks and Shares ISA. It's essential to check for any exit fees before making decisions about transferring or withdrawing funds.
Currency Conversion Fees
If you invest in assets denominated in a currency different from your ISA account currency, GBP, currency conversion fees may apply when buying or selling those assets - for example, if you were to invest in US stocks like Apple or Tesla.
While many providers offer free transfers of ISAs, some may charge a fee for transferring your Stocks and Shares ISA to another provider.
Some providers may charge fees if your ISA account remains inactive for an extended period. This encourages regular engagement with your investments.
Additional Service Fees
Depending on the provider, there may be fees for additional services, such as receiving paper statements, accessing research tools, or receiving advice.
It's important to carefully review the terms and conditions of the Stocks and Shares ISA offered by a provider, including the fee structure and any rates or charges, before opening an account. Understanding the potential costs ensures that investors can make informed decisions, factor in the costs associated with their investment strategy and preserve profits.
What is the bottom line?
While Stocks and Shares ISAs offer numerous advantages, it's important for investors to carefully consider their financial situation, risk tolerance, and investment goals before choosing this investment vehicle. Like with any investment, your capital is at risk and your investments may fall in value.
This information is based on current HMRC tax rules, so it may change and will be personal to your circumstances. Be sure to check GOV.UK for the latest information before making any decisions.
Interested in learning more about Stocks and Shares ISAs and the world of investing but don’t know exactly where to start? We would always recommend practising without any real money before you start. Try the Pluto demo (no real money) environment on the free Pluto app.