Self-select ISAs

What is a self-select ISA?

A self-select individual savings account (ISA) is a way to invest in equity funds and individual stocks and shares - and shelter the returns from tax. As the name suggests, you pick which shares to hold in your ISA, rather than having an investment company or provider or fund manager make the decisions for you.

How do self-select ISAs work?

Self-select ISAs, like their cash ISA counterparts, are free of income tax and capital gains tax. Other key things you should be aware of are...

• The maximum you can hold in a self-select ISA or any stocks and shares ISA this tax year (2022/23) is £20,000

• Your annual ISA allowance is £20,000 but you can split this across different types of ISA - so you could have £12,000 in a cash ISA, for example, and £8,000 in a self-select equity ISA

• To invest in a self-select ISA, you can open an account through a provider offering self-select ISAs

• Once you open your account, you can then choose the investment funds you want.

• You are completely in control of what you invest in and the investments in your self-select ISA grow free of any tax

What can I invest in with a self-select ISA?

• Individual shares

• Corporate bonds 

• Investment trusts

• Open-ended investment companies

• Gilts (government bonds)

• Unit trusts 

• Exchange-traded funds (EFTs)

• Exchange-traded commodities 

What type of self-select ISAs are available?

When you choose to use a self-select ISA, you must also choose whether you need a broker or ISA provider that offers advice or one that doesn’t, known as an execution-only broker. 

Execution-only brokers often have the lowest fees as they simply provide the internet trading platform you’ll need to trade shares and other investments.

However, broker firms that offer advice charge more because they will help you decide which funds and company shares to pick – using their knowledge of the markets.

What are the advantages and disadvantages of self-select ISAs?

There are a number of pros and cons to consider when thinking about a self-select ISA. Here are some of the main things to think about: 

Advantages:

• You’re in control. Being in charge of the investments you hold within your ISA, gives you more control in comparison to handing the reins over to a fund manager

• Tax benefits: As investment growth and dividends received within the ISA are free of capital gains and additional income tax, this can be particularly advantageous for higher-rate taxpayers and those with large share portfolios

• Freedom: You can change your investments within your ISA if you want to, subject to the £20,000 annual investment limit 

• Protection: Stocks and shares ISAs are eligible for the Financial Services Compensation Scheme (FSCS) for up to £85,000 per person, per institution. Customers of investment firms that went bust before April 2019 are covered by the FSCS by up to £50,000 per person, per institution

Disadvantages

• High risk: Self-select ISAs can be higher risk than other types of ISAs and the value of your investment can fall. There is no guarantee that you will make money. You could end up with less money than you put in. In contrast there is no risk to capital with a cash ISA

•  More involvement: With a self-select ISAs you are more involved in your investment. But that means you will need to keep an eye on how your investments are performing. If you don’t have the time to do this, a self-select ISA may not be best for you 

What are the tax advantages of having a self-investment ISA?

The tax advantages of ISAs have reduced in recent years due to tax regime changes in the UK. 

For example, everyone has a £2,000 annual dividend tax allowance, which means they can earn this much in dividend income without having to pay tax. Only those on higher rates of tax who earn more than £2,000 of dividend income in a year will therefore enjoy additional income tax benefits from holding shares in an ISA.

The annual allowance for capital gains tax – CGT - is £12,300 (2022/23 tax year). This is the amount of profit you could make from the sale of shares in a year without paying tax, even if those shares were held outside an ISA.

Is a self-select ISA right for me?

A self-select ISA puts you in control of what you invest in so it can have an appeal to more experienced or confident investors. They can also offer good tax benefits – particularly for higher rate taxpayers. 

Conversely, if you're a relatively inexperienced investor you may feel more comfortable with a standard stocks and shares ISA where your investment is overseen on your behalf by a professional fund manager.

You'll still benefit from the tax-free ISA wrapper and gains in the stock market, but won't have to actively engage with your finances as much.

What are my alternatives to a self-select ISA?

If a self-select ISA doesn't suit you, you may want to consider another type of ISA. Here's a snapshot look at what else is available..

- Fixed rate cash ISA. These are much like saving accounts and aren't linked to the stock market in any way. You get a fixed return but your money is tied up for a set period

- Easy access cash ISA: These operate similarly to a fixed-rate ISA, but you can withdraw money during the term. The other key difference is the interest rate is variable

- Lifetime ISA. Also known as a LISA, these are designed to help you save for a first home or retirement. Best of all, you qualify for a 25% bonus from the government.

Keen to find out more? Take a look at our comprehensive guide to ISAs.

Other useful guides

We have a range of detailed guides with information for savers and investors. Find out more: 

Savings vs Investments

Understand the ISA basics

Guide to cash ISAs

Guide to stocks and shares ISAs

Compare stocks and shares ISAs with MoneySuperMarket

MoneySuperMarket doesn’t offer a comparison service for self-select ISAs but we have a broad range of guides and information to help you with your ISA decisions. You can also compare stocks and shares ISAs within our investments hub.