Looking for a tax-free home for your investments? Want to pick your own shares? If so, a self-select ISA could be for you.
What are self-select ISAs?
A self-select individual savings account (ISA) is designed to house shares and shelter the returns from tax. As the name suggests, you select which shares to hold in your ISA, rather than have a fund manager make the decisions for you.
Self-select ISAs, like their cash ISA counterparts, are free of income tax and capital gains tax. The maximum you can hold in a self-select ISA or any stocks and shares ISA this tax year (2021/22) is £20,000.
Note that 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 ISA.
ISA tax advantages
The tax advantages of ISAs have reduced in recent years because of changes to the general tax regime.
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.
As far as capital gains tax (CGT) is concerned, the annual allowance currently stands at £12,300 (2021/22). 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.
Why choose a self-select ISA?
Experienced investors who want more control over their investment choices often go down the self-select ISA route. They offer much more control, as you’re the one making the investment decisions.
Remember that the value of your investment and the income derived from it can go down as well as up, and you may get back less than you originally invested.
What types of self-select ISAs are available?
As well as individual shares, there is a range of other assets that can be held within a self-select ISA, including unit trusts, investment trusts, open-ended investment companies, bonds, gilts and exchange traded funds.
Remember that the value of these investments can fall as well as rise, so there is more risk attached with investing in a stocks and shares ISA than there is with a cash ISA.
When you choose to use a self-select ISA, you must also choose whether you need a broker 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. Conversely, broker firms that offer advice charge more because they will help you decide which shares to pick – using their knowledge of the markets.
What are the advantages of a self-select ISA?
Picking the investments you want to hold within your ISA gives you much greater control in comparison to handing the reins over to a fund manager.
However, you should bear in mind that you 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 is probably not right for you.
Another advantage of a self-select ISA is the 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.
You can change your investments within your ISA if you want to, subject to the £20,000 annual investment limit.
Stocks and shares ISAs are eligible for the Financial Services Compensation Scheme (FSCS) up to £85,000 per person, per institution. Customers of investment firms that went bust before April 2019 are covered by the FSCS up to £50,000 per person, per institution.
What are the disadvantages of a self-select ISA?
Self-select ISAs can be higher risk than other ISAs. If you are in any doubt as to whether these plans are suitable you should seek independent financial advice – it’s possible your investments might fail, so there’s no guarantee you’ll get your money back.
How can MoneySuperMarket help?
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 cash Isa deals within our savings hub.