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Stocks & Shares ISAs Guide

Everything you need to know about stocks and shares ISAs

An investment ISA can offer the potential for higher returns than cash over the long term, but they come with risks. Our guide explains...

By Tim Heming

Published: 04 May 2022

A £1 coin is put back in the purse

 

 

What is a stocks and shares ISA?

A stocks and shares ISA is an investment account that lets you put your money into a range of different investments and benefit from tax-free returns. It is different from a cash ISA, which is a tax-free savings account. As an investment, there is greater risk with a stocks and shares ISA. But you could potentially make greater returns compared to cash, over the long term. 

How does a stocks and shares ISA work? 

You start by choosing an appropriate stocks and shares ISA depending on the terms of the account and how much risk you want to take with your cash. 

Your money is invested in a range of assets, and you benefit – usually without having to pay income tax or capital gains tax – from the return as their value increases. You can withdraw the money when you wish. 

Depending on the ISA provider and your underlying investments, there may be charges for managing the account and when you want to sell your investments.

What are the different types of stocks and shares ISA? 

The type of stocks and shares ISA you choose generally depends on how hands-on you want to be with your investment. Options are as follows: 
 
Self-select ISA 
You open a stocks and shares ISA and then choose the investments that will be in the tax-free wrapper. You should research before you buy to be confident you have the right mix of investments that suit your appetite for risk.

Managed stocks and shares ISA 
This is where an investment manager will look after the funds on your behalf to try to maximise your returns. There is usually a fee for this service.

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

You can include a wide range of different investment products (sometimes called assets) in a stocks and shares ISA in the UK. These can include:

  • Individual stocks and shares 

  • Unit trusts

  • Investment trusts 

  • Exchange-traded funds (ETFs)

  • Government or corporate bonds

  • Open Ended Investment Companies (OEICs)

What are the pros and cons of stocks and shares ISAs? 

Stocks and shares ISAs offer many advantages for investors – but it’s important to weigh up the pros and cons. 

Advantages:

  1. Your investment ISA may give you high returns that are potentially unlimited.

  2. You’ve lots of choice as to where you can invest and how hands-on you want to be in managing your investments. 

  3. While stocks and shares ISAs aren’t risk-free, you can choose more or less risky investments to suit your attitude to risk

  4. You can choose to invest in social and ethical investment funds that match your values.

Disadvantages

  1. The value of your investment ISA can go down as well as up. 

  2. There will usually be fund fees and charges, such as platform, management and exit fees when it comes to selling the assets.

  3. Stocks and shares ISAs may not be as suitable for short term investors because of market volatility.

What is the ISA allowance for the 2022/2023 tax year?

You can save up to £20,000 tax-free in an ISA for the 2022/2023 tax year. This is the same as the previous year, and the money can be invested entirely in a cash ISA, a stocks and shares ISA or split between the two.  

You could also use a Lifetime ISA for part of the allowance, if eligible. You cannot roll your allowance over to the next tax year, so you have to use it or lose it by April 5.

How many stocks and shares ISAs can I open?

You can only open one stocks and shares ISA in any tax year. But you can retain stocks and shares ISAs from previous years. You can also open one cash ISA each tax year. 

Can I withdraw money from my stocks and shares ISA? 

You can withdraw money from your stocks and shares ISA, but check the terms to see if there are any rules or charges for making withdrawals. If you have a flexible stocks & shares ISA, you can take money out and place it back again within the same tax year without affecting your annual ISA limit. 

Will I have to pay tax on my investments?

You don’t have to pay dividends tax, capital gains tax or income tax on the returns on your stocks and shares ISA. 

If you move existing investments into a stocks and shares ISA it could lead to a capital gains charge because your ISA provider has to sell the investments before re-purchasing them within the ISA. It depends on whether your investments have increased in value and if you’ve already used up your capital gains allowance. 

Stocks and shares ISAs also don’t shield you from inheritance tax or stamp duty when buying shares. 

What is the difference between a stocks and shares ISA and a cash ISA? 

A stocks and shares ISA is an investment where the return you get depends on the value of the assets you buy. This means it is variable and can go up and down. 

In contrast, a cash ISA is a tax-free savings account, where you’ll receive interest on your balance. As such, there is more risk to a stocks and shares ISA, but also the chance of better returns.

Is my money safe in an investment ISA? 

As with all stocks and shares ISAs the value of your investment can go down as well as up, so you should choose your investments wisely and depending on your own appetite for risk. 

If your ISA provider goes bust then the money in your account is protected up to the first £85,000 through the Financial Services Compensation Scheme (FSCS). This is for UK ISA providers who are regulated by the Financial Conduct Authority.

Compare stocks and shares ISAs with MoneySuperMarket

You can view a range of stocks and shares ISAs quickly and easily with MoneySuperMarket. We’ll show you details about the different accounts, the minimum deposit you’ll need to invest and the management fees and charges that might apply.  

Once you’ve made your choice you can click through and open the account with the provider.