Everything you need to know about tax-free investing
A Stocks & Shares ISA is a must-have for any investor.
But what are they and how exactly do they work?
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Here at Be Clever With Your Cash, we’re not regulated to give you financial advice. We aim to give you the facts about a provider or investment but it’s up to you to decide if it’s suitable for you. If you’re looking for more personalised guidance, find a financial adviser who can give you specific advice. Remember that your capital is at risk when investing — don’t invest more than you are prepared to lose.
A Stocks & Shares ISA, also known as an investment ISA, is an account that allows you to invest in different assets including shares, bonds and funds.
An ISA is often referred to as a ‘tax wrapper’ because any returns your investments make within the account are tax-free. So you won’t have to pay any income tax or capital gains tax on any profits or dividends you make.
If you’re over 18 and a UK resident, you can open one – or more than one. New ISA rules introduced on April 6 2024 mean you can open and pay into multiple ISAs of the same type each year.
ISAs can only be held by one person – you can’t have a joint ISA.
As per the ISA rules, everyone can pay up to £20,000 each tax year into their ISA. But this ISA allowance is spread across all ISAs, including Cash ISAs, Stocks & Shares ISAs and Lifetime ISAs. So you could split your allowance between whatever ISAs you have or pay the entire £20,000 into just one.
As the annual allowance resets each year, you can start to save again from April 6. So over time you can have much more than £20,000 in a Stocks & Shares ISA or other ISAs.
For example, if you added £10,000 to your ISA in the 2023/24 tax year, and £11,000 in 2024/25, you’d have added more than £20,000 to your ISA or ISAs, but that’s ok as it’s over different financial years. But if you added £21,000 in the 2023/24 tax year, you would be over the limit.
And this is before you account for any growth or dividends. These are outside of the annual allowance, so if you added £18,000 at the start of a tax year and it grew by £2,000 to £20,000 eleven months later, you’ve still only added £18,000. That means you’d still have another £2,000 you could add before the next tax year begins.
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Shielding your profits and investment income from tax is the ultimate benefit of using an investment ISA and why it’s a good idea to open one if you’re planning on investing.
They also have the potential to offer a better chance of growing your money, compared to other types of ISAs and savings accounts. In the year February 2024 to February 2025, the average return on Stocks & Shares ISAs was 11.86%, compared to 3.8% with lower-risk Cash ISAs, according to data firm Moneyfacts.
However, past performance isn’t an indicator of how they’ll do in the future and any investment comes with risk – which I’ll cover more below.
It’s really easy to open a Stocks & Shares ISA. There are plenty of platforms that offer Stocks & Shares ISAs and you can choose to manage your portfolio yourself or have it managed by a professional.
As with any investment, a Stocks & Shares ISA isn’t risk free. The value of your investments can go up and down and you may end up with less money than you started with. However, the idea is with investments that you leave them for at least five years – but the longer the better. That way, you’re giving your money more time to grow and ride out those bumps in the market.
With that in mind, Stocks & Shares ISAs might not be suitable for short-term investors. Any investor should make sure they’ve got an emergency fund – three to six months cash savings in an easy-access account – and paid off any expensive debts.
Another con is the cost. Unlike a Cash ISA, a Stocks & Shares ISA isn’t typically free. While you’re not technically paying for the investment ISA, you might be charged a fee by the platform you use, and there’s always a cost for the investments you buy. This is usually a percentage of your investment or a flat fee.
However, these charges apply to any investments, whether you use an ISA or not. To make things easier, we’ve listed our favourite Stocks & Shares ISAs and the fees they charge.
And maybe for some wealthier investors the £20,000 a year ISA cap could be a bit of a problem. But you can invest outside of an ISA, using a General Investment Account (GIA) for example, although you may need to pay capital gains tax on profits or income tax on dividends.
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If you choose a platform that’s covered by the Financial Services Compensation Scheme, up to £85,000 of your money will be protected if the provider collapses. However, as I mentioned earlier, any investment can go up and down in value and you could lose money.
But the longer you leave your money invested, the more time it has to grow and recover from any market dips.
You can buy a Stocks & Shares ISA straight from an ISA provider – like a bank or investment firm – or through a fund manager, financial adviser or stockbroker.
However, the cheapest way is often via websites or apps called platforms. If you’re not sure where to start, check out our list of our favourite Stocks & Shares ISA platforms.
Yes, you can – if the new provider allows it. There are two ways to transfer your investment ISA, either ‘in specie’ or selling your investments and moving the cash.
With the first option, all your investments stay invested and are transferred to the new provider. People tend to opt for this one if they’re happy with their investments, however it can be a long process (we’re talking between four to six weeks) and you may be charged exit fees.
Or you can go for the second option and sell your investments and transfer the cash to your new provider. Your money will still be within the ISA wrapper the whole time but it’ll be uninvested meaning you could potentially lose out on market gains. It might be quicker but you might not be able to buy back your exact investments on the other side.
Unlike transferring a Cash ISA, transferring a Stocks & Shares ISA has nothing to do with getting better returns – that depends on your investments. However, you may decide you want to move to a new platform to try and cut the cost of your charges, get better features or customer service or more investment choice.
Yes, you can have both and pay into them in the same tax year. But you must be under the age of 40 to open a LISA.
You can contribute up to £4,000 into a Lifetime ISA each year which is taken out of your £20,000 annual allowance, and you’ll get a 25% boost from the Government on top of your returns.
If you’re planning to invest, it’s definitely worth considering a Stocks & Shares ISA because of the tax benefits. You can keep the costs low by buying one via an online platform (make sure it’s covered by the FSCS) and opting to manage your investments yourself.
You can keep it simple and cheap by opting for passive investments, like an index fund or Exchange Traded Fund (ETF), and either paying in monthly sums, if you’re starting off small, or depositing a lump sum if you’ve got the money to invest.
Do check out our step-by-step guide on how to invest for more information.