What is a stocks and shares ISA? - Times Money Mentor (2024)

Astocks and shares Isaoffers the attractive prospect of growing your money without having to pay tax on any profits you make.

There are dozens of providers which can open and host an Isa for you. You can put up to £20,000 a year into one and then spread the money across your choice of stocks, funds and low-cost ETFs.

Some providers offer the option of a ‘ready-made’ stocks and shares Isa which will invest any money you add across an appropriate mix of investments on your behalf.

In this article, we explain:

• How does a stocks and shares Isa work?
• What are the stocks and shares ISA rules?
• What are the benefits of a stocks and shares Isa?
• How much does a stocks and shares Isa cost?
• Is a cash Isa better than a stocks and shares Isa?

Related content: Guide to Isa rules

Isa, which stands for individual savings account, is a tax-efficient way to save or invest your money. Any money earned within this wrapper is free of both income and capital gains tax. Currently, you can contribute up to £20,000 into Isas in a given tax year.

We explain the rules and different types of Isa in more detail.

Unlike a cash Isa, where the bank provides a pre-determined rate of return, the money made from a stocks and shares Isa is always uncertain. You could end up outperforming the very best cash Isa equivalents, but you can also lose your original capital.

Stocks and shares Isa holders can also determine where their investments will be held or, if their provider permits, it can be managed by an experienced professional via a ready made portfolio.

To open one of these accounts you’ll need to get in touch with either a:

• Bank
• Stockbroker
• Fund management company
• Investment platform

Look carefully at the fees and range of investments on offer before opening a stocks and shares Isa.

Some Isas are better value for those with large amounts of money who want to buy and sell investments frequently. Others are best for smaller, less active investors.

All investments carry a varying degree of risk and it’s important you understand the nature of these. The value of your investments can go down as well as up and you may get back less than you put in.

There are some rules you should be aware of before opening a stocks and shares Isa:

• You have to be 18 or over and a UK resident to open one, though adults can open Junior Isas for minors
• You currently get an allowance of £20,000 each tax year (2024/25)
• The allowance can’t be carried forward to the next tax year, so use it or lose it
• You can open and manage as many stocks and shares Isas as you wish. Previously, you could only open one in each tax year

Read more: self-invested stocks and shares Isas

“Making use of Isas to shelter savings and investment from taxation is incredibly important with the UK tax burden estimated to be at the highest level since the Second World War,” said Jason Hollands, managing director at Bestinvest, a finance company.

With that in mind, stocks and shares Isas benefit from the following:

• No income tax to pay on any profits you make
• You don’t have to worry about paying dividend tax
• Profits are free from capital gains tax
• You don’t have to declare profits on your tax return, saving you time.

The only tax that you may have to pay in an Isa is stamp duty charged at 0.5% when you buy shares worth more than £1,000 but this is often included in the purchase price of the shares. Find out more about how shares are taxed here.

But, depending on the size and performance of your investments, you may not be required to pay tax. So below we’ve briefly listed some of the tax rules which come into play outside any stocks and shares Isa wrapper:

Capital gains tax

Capital gains tax is due on the sale of assets, such as shares or an investment property, of £3,000 or more. We explain more in our guide to capital gains tax.

Dividend tax

Like the personal savings allowance, the rate of dividend tax is determined by your income tax bracket.

• Basic-rate taxpayers pay dividend tax at a rate of 8.75%
• Higher-rate taxpayers pay 33.75%
• Additional-rate taxpayers pay 39.35%

You can earn up to £500 tax free from dividends each tax year before this rule comes into play.

Read more: ‘Opening a stocks and shares ISA changed my money habits’

Will I make money with a stocks and shares Isa?

As mentioned, there are no guarantees that you will make money by investing in a stocks and shares Isa.

That said, if you invest in a diverse range of investments and remain invested for the long term, there is a high probability that you will make money on at least some of those assets.

Take the performance of the FTSE 100, for example. It’s a list of the UK’s biggest listed companies, and if you invested in it a decade ago you would have seen average returns of about 5% a year, according to Times Money Mentor calculations based on data from the London Stock Exchange.

In comparison, Moneyfacts, a data company, said the average cash Isa paid 1.42% each year over the same period.

Try out the Wealthify calculator below to get an idea of how much money you could earn if your investments are successful.

Bear in mind that other investment platforms will have different styles and levels of risk, so the categories below only apply to Wealthify products. Also remember there are also no guarantees when it comes to investing, so you could lose money too.

Can I lose all my money?

Yes, you can. But you only really crystallise a loss if you sell your investment for less than you bought it for or if the company goes bust.

Here are some tips to consider:

• Invest in an Isa for the long term: If you don’t sell, the loss hasn’t been “crystallised”. If you leave your lump sum invested, your investment account might start to increase, so don’t panic if things go south over a short time frame.

• Spread your risk: By investing across lots of different asset classes you also reduce your risk. If you stay invested in one asset class and it falls, the entire value of your holding falls too. If this is just one investment across several asset classes then the chances are your holdings will be more stable.

Find out more about the basics of investing in our beginner’s guide to investing.

Yes, this is a new change introduced in April 2024.

Previously, you could only invest in one Isa type each tax year. For example, suppose you opened a stocks and shares Isa with Vanguard and deposited £10,000 in the last tax year. Under the now abolished rules you weren’t allowed to open up a stocks and shares Isa with AJ Bell with your remaining allowance.

Now, you can open as many stocks and shares Isas as you see fit. It can be a great option if you wish to make an investment which is exclusive to one platform.

To transfer an Isa you need to contact the new provider and fill out an Isa transfer form. The provider will do the rest.

Transfers should take no longer than:

• 15 working days for cash Isas
• Or 30 calendar days for a stocks and shares Isas

It’s also worth noting that this tax year you’re allowed to make partial transfers. Previously, if you wanted to move a cash Isa to a stocks and shares alternative, and you had contributed towards that cash Isa that tax year, you were required to transfer at least your entire contribution for that tax year.

Now you can decide how much or little you wish to move across. Just remember that your provider might state its own rules.

What are my options?

When you transfer a stocks and shares Isa you have two options:

• “In-specie” transfer – opt to leave your investments untouched as long as the new provider offers access to the funds and shares you own, meaning you don’t miss out on any investment gains during the switching process
• Sell your investments and move the cash across – this means you will have to select investments through your new provider

NOTE: In-specie transfers are typically more expensive than cash transfers. Some providers charge a fee for each investment you hold so do your homework first.

Whatever you do, avoid just withdrawing your cash and closing your account as you’ll lose the tax-free advantage. When you reinvest your money it will eat into your current year’s allowance.

Unlike a cash Isa, which is normally free, there are costs involved with a stocks and shares Isa.

You will pay various fees when holding an investment Isa. These are to cover market research and management costs, and dealing charges.

Below are some of the fees to expect:

Platform fees

These are charged by the investment platforms you use to buy and sell shares, and the fees help them cover the cost of running your account.

They will either take the form of:

• A percentage of the amount you have invested in your portfolio, such as 0.35% annually
• Or a flat monthly fee, such as £9.99 a month.

If you have a large investment portfolio, a flat fee might work out as cheaper.

Fund management charges

These are paid in addition to platform fees, and cover expenses that come with managing an investment fund. They are typically charged as an annual percentage of your portfolio.

Management charges can be as low as 0.1% for a passive tracker fund where the returns simply mimic the performance of a stock market index.

This is instead of a fund employing an “active” manager looking to pick certain shares with a view to beating the market.

Buying and selling charges

Many providers will charge a fee every time you buy or sell an investment. This is often known as dealing charges.

Providers have a wide range of charges which depend on the type of investment.

For example, AJ Bell charges:

• £1.50 to trade funds
• £5 for shares

Some platforms offer regular-dealing discounts – so if you buy or sell a certain number of times a month, the cost falls.

Transfer-out fee

Some platforms will charge a fee for switching to another provider. But many do not impose an exit fee.

It’s vital to understand the fees that you are paying as they really do eat into your returns and could scupper your financial goals. Check out our article on the impact of fees on investment returns.

What can I invest in?

Your choice of investment depends on the company you choose to open the Isa with.

Most investment platforms have lots of choice of different types of asset. For example:

• Shares: you buy a tiny bit of a company on the stock market and so benefit from growth in that company – but if the business starts to struggle, the price of your share may fall.Find out how to choose investment funds.
• Bonds: effectively you lend money to companies or governments for a set period of time in return for interest payments
• Funds or investment trusts: your money is pooled with many other investors and used to buy into lots of different companies in the UK or worldwide. It is an easier way to spread risk rather than trying to buy lots of individual shares. Find out how to buy shares.

Is a cash Isa better than stocks and shares?

The answer to this question largely depends on when you want access to your money.

If you think you might need to access your savings account in less than five years or can’t afford to lose money, a cash Isa  is likely to be a better option.

Alternatively, if you are happy to leave your money invested for the long term and are comfortable taking on some risk, you could start investing in a stocks and shares Isa instead.

But you don’t have to pick one or the other: you could keep your emergency buffer in a cash Isa and invest the rest in a stocks and shares one.

If you are still asking yourself whether you should invest in a cash Isa or a stocks and shares Isa, we compare them. Also fill in our survey below to find out which type might be best for you.

You also might want to read our simple guide to Isas.

If you are fed up with the paltry interest rates on savings accounts, you might be ready to take some risk in the hunt for higher returns.

If you have lots of savings in a low interest rate account or in Premium Bonds, investing through a stocks and shares Isa can help you earn more from your money over time.

You should be prepared to leave your lump sum invested for at least five years to ride out any short-term market wobbles.

As with all investing there are no guarantees that you will get your lump sum back, so pick carefully.

Find out the best stocks and shares Isas according to our independent ratings. Some providers offer ready-made portfolios while others are more suitable for DIY investors.

If you are keen to discover more about the basics of investing then check out our beginner’s guide to investing.

Before you open an investment Isa…

When you start investing, it’s a good idea to be prepared to leave that money tied up for at least five years to give it the best chance of growing.

As you won’t have ready access to the cash, here are some things you should do first:

1. Pay off your debts

In general, it is better to pay off expensive debt before investing any spare savings.

For example, the interest rate on a credit card or overdraft tends to range between 20% and 40%, and it is unlikely that your investments would perform well enough to generate returns that beat this. A personal loan may come with a lower interest rate than a credit card or overdraft, so it could also be an option.

2. Have a rainy day fund

It’s best not to put all your savings in the stock market.

Ideally, you need some cash set aside in an account to which you can gain access easily in the event of an emergency or large, unexpected outlay – such as if you have to replace a broken boiler or you need a new car.

There is no set amount for how much you should have set aside in a rainy-day fund. But aiming for a savings pot of three to six months of outgoings is a good place to start. 

This should be enough to cover living expenses in the short term if, for example, you suddenly find yourself out of work.

3. Check your affordability

Investment Isas are designed for long-term savings. Financial advisers say that, ideally, you should not withdraw the money for at least five years.

This will give your investment time to ride out any short-term troughs in the stock market and ensure you can take advantage of the good times to generate decent returns.

If you are wondering how much to invest in a stocks and shares Isa, there is no set answer as everyone’s financial circ*mstances will be different.

To be on the safe side, only put in what you can afford to lose.

If you want more help that’s tailored to your circ*mstances, Kellands is offering all of our readers a free hour-long session with one of its independent financial advisers. They can get a good idea of your financial goals, and help you take the first step to achieving them.

Investment Isas, where you invest your savings in the stock market, could offer you the chance to make higher returns. However, returns are not guaranteed and you could make a loss if you withdraw your money at a time when markets are down.

Below are five ways you can make the most of your stocks and shares Isa:

1. Use your full allowance

If you can, it’s worth maxing out your Isa allowance each tax year to try and maximise your investment returns.

You cannot carry forward any unused Isa allowance into the next tax year. So either use it or lose it.

However, it should be stressed that you should not aim to hit the annual allowance of £20,000 at all costs. It is a high limit and many savers will probably not get close.

2. Choose a strategy that works for you

Think about your investment goals. Are you saving for a property, school fees or retirement?

This should help steer your attitude to risk because if you might need to get hold of the money within the next five years – to put down a house deposit, for example, or pay for a child’s education – then you might be better off with cash savings.

In contrast, the longer you are happy to keep your money invested, the higher your level of risk should be in pursuit of the higher returns more likely with an investment Isa.

Investment choices can be overwhelming. Find out more here about how to choose investments.

3. Invest for the long term

Investment Isas are designed for the long-term savings.

Do not assume you can make a quick return; you may see the value of your account fall in the short term. There is even a chance it may never recover.

However, history shows us that money invested for the long term is likely to grow. US stocks have averaged 10-year returns of 9.2% over the past 140 years, according to investment bank Goldman Sachs.

A study from Barclays, which analyses stock market data since 1899, shows that £100 invested in 1899 would be worth £32,025 today (assuming the reinvestment of dividends).

4. Ignore trends

Seasoned investors will tell you not to follow the herd in which shares you buy, but instead to seek out your own opportunities with up-and-coming stocks.

However, the reality is that this is hard to achieve if you have limited time to research the stock market in depth.

Many savers will instead pay into an investment fund where managers look for opportunities on their behalf.

5. Diversify

For many people, the safest approach is to diversify as much as possible in the market sectors and individual companies that they hold as investments.

This could mean buying a share in a fund that invests in hundreds of companies – rather than leaving investors over-exposed to the fortunes of any one business or industry.

A mix of investments should help shelter your money during periods of stock market turbulence.