The whole point of an individual savings account (ISA) is that you don’t pay tax on your gains there: but the rules are changing
ISAs are one of the most popular ways to save and invest money in the UK, with millions of people putting billions of pounds into them each year.
The big draw, of course, is that they’re tax free — while other savings and investments get income tax, capital gains tax and more applied to their growth.
Except, there are taxes and duties that can still take a bite from money held in a Stocks and Shares ISA, and there are about to be more.
We explain what you need to know.
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Yes, and you always have. But you pay significantly less tax than you would in a standard investing account.
Taxes you are exempt from in a stocks and Shares ISA
Currently you don’t pay any income tax, dividend tax or capital gains tax on money made in a Stocks and Shares ISA.
That saves you up to 24% capital gains tax on any money you’ve made when you sell your shares or other investments and as much as 45% tax on interest on cash held in one.
Dividends, and dividend tax, are talked about a lot less often, but are one of the best ways to make money from owning shares. Companies frequently hand out some of their profits to shareholders in the form of dividends – and this can be worth as much as 8% of the value of the shares. On average, over the past few years, FTSE 100 companies have paid dividends of between 3% and 4%.
But these dividends are subject to tax of 10.75% for basic rate taxpayers, 35.75% for higher rate taxpayers and 39.35% for additional rate taxpayers. You have an annual allowance of just £500 on dividends before tax is applied.
In a Stocks and Shares ISA you don’t pay any dividend tax at all
Taxes that still apply to stocks and Stocks and Shares ISAs
There are two taxes that you’re not protected from by a Stocks and Shares ISA — stamp duty and inheritance tax.
Stamp duty applies to people buying both houses and shares, it’s the cost of registering legal ownership with the government.
With shares, it’s a lot smaller than with houses – at just 0.5% – but it does still apply to things inside your ISA.
Inheritance tax is, naturally, only levelled on your estate after death. So it’s not something you’ll ever pay yourself.
But money held in a Stocks and Shares ISA is in no way protected from it after you die which could see as much as 40% taken from your ISA by the government.
However, you can pass your ISA on to a spouse or civil partner tax free. Their ISA allowance will be increased to allow them to add your ISA savings to their own.
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From April 2027 onwards, Stocks and Shares ISAs will no longer be exempt from income tax.
That means if you have cash in the account, any income from savings will be subject to tax.
Worse, that tax rate is going up.
Next year tax on savings interest is rising by two percentage points, to 22% for basic rate taxpayers, 42% for higher rate taxpayers and 47% for additional rate taxpayers.
You’ll also be blocked from transferring money directly from a Stocks and Shares ISA into a Cash ISA.
Stocks and Shares ISAs will keep their tax-exemption for capital gains tax and dividend tax.
There is an upper limit to how much you can save into a Stocks and Shares ISA each year, but no limit to what you can build up overall.
The annual limit is currently £20,000 – but the allowance covers all your ISA savings in a year. That means the £20,000 limit is shared across Cash ISAs, Lifetime ISAs, Innovative Finance ISAs as well as Stocks and Shares ISAs.
So every pound you save in an ISA elsewhere is one pound less you can put into a Stocks and Shares ISA that year.
ISA transfers also don’t count against the limit — so if you move money from your Cash ISA into your Stocks and Shares ISA that doesn’t affect how much new money you can add that year.
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Recent rule changes mean you can open as many Stocks and Shares ISAs as you like in any given year, and invest in as many or as few as you like too.
The only caveat is that you’re still held to you overall contribution limit of £20,000 – although you can move money between ISAs without affecting that.
So, if you put £4,000 into a Lifetime ISA, £1,000 into an Innovative Finance ISA and £10,000 into a Cash ISA then you’ve used up £15,000 of your annual limit.
That would leave you £5,000 to put into Stocks and Shares ISA.
An ISA is, in technical terms, a “tax wrapper”. That means it can be applied to any sort of account as long as it meets the conditions.
From a practical point of view, that means there as many types of stocks and shares ISA as there are general investing accounts — and most providers that offer one, also offer the other.
There are two fundamental types of these accounts — managed and self-selected.
Managed accounts take your money and put it in the markets for you — they’re very low effort on the part of the saver, but cost a little more in terms of fees.
Self-select, or DIY, accounts let you buy and sell shares yourself. This can mean you save on fees, but also mean you’re responsible for managing your investments and picking what shares to buy and sell yourself.
There’s a hybrid option between these two — that offer lower fees than managed accounts and less personal involvement than a full DIY account.
These Stocks and Shares ISAs let you pick between a few funds — such as high-growth, medium growth, ethical etc — rather than the whole market. This offers some control, but also means the funds are managed for you.
We’ve rounded up the best DIY Stocks and Shares ISAs here and the best managed Stocks and Shares ISAs here. We’ve also picked our overall winners from both categories of Stocks and Shares ISAs here.
While not entirely tax-free, and getting even less so in April, Stocks and Shares ISAs still offer massive protection against dividend and capital gains tax.
If you’re investing, or putting money into the markets generally, you should probably be using one.
The only exception is if you’re saving for your retirement, where putting money into a self-invested personal pension (SIPP) might be better overall.
These let you claim back the money you pay in income tax, boosting your savings overall, and then let money in the SIPP grow free from capital gains tax and dividend tax. However, when you draw money from the SIPP, it counts as income for tax purposes.
