Stocks & shares ISAs

If you’re willing to accept the ups and downs, stocks & shares ISAs could deliver higher returns than other savings. But what are stocks & shares ISAs and are they worth the risk?

If you’re willing to accept the ups and downs, stocks & shares ISAs could deliver higher returns than other savings. But what are stocks & shares ISAs and are they worth the risk?

Written by
Alex Hasty
Insurance comparison and finance expert
Last Updated
5 APRIL 2023
12 min read
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What is a stocks & shares ISA?

A stocks & shares ISA, also known as an investment ISA, is an Individual Savings Account in which you can hold investments in a wide range of shares, funds, trusts and bonds. The benefit of a stocks & shares ISA is that you won’t have to pay tax on the money you earn from your investments.

Compare the Market doesn’t offer a stocks & shares ISA comparison service. We recommend you get independent financial advice before opening an account.

How do stocks & shares ISAs work?

You’ll need to choose a provider for your stocks & shares ISA, as well as the investments you want to put in it. The provider may offer a ready-made portfolio – a collection of investments – or you can choose to do some research and buy your own. There are various online trading websites, called ‘platforms’ you can do this through.

Another option is a so-called ‘robo-fund’ or ‘robo-advisor’. These are online services for choosing investments. Because they’re mainly automated, based on computer algorithms, fees can be low. You’re asked to fill in an online questionnaire, including questions about your attitude to risk, then a portfolio of investments is allocated to you. Some of these services offer cashback on your investment.

See our guide to stocks and shares.

Types of stocks and shares ISA platforms

There are two different types of stocks and shares ISA platforms, with each having their own advantages:

Do it yourself platforms
DIY platforms are best for people who are experienced investors who know what they’re doing. If you’re happy to put in the time to research and learn all about your investments and analyse the market, then you can build and take full ownership of your portfolio. This could include various stocks, shares, funds, unit trusts or ETFs (exchange-traded fund), and won’t need to pay anyone to manage your money for you, meaning you could make the most of any dividends. However, while you won’t pay a management fee, you may be charged fees for various transactions and transfers.

Ultimately, if you have the confidence to do it, a DIY platform can work really well for you, giving you full control over your investments. However, it’s a double-edged sword, which means you’ll be responsible for your own successes, and any failures. So, be careful when deciding which road to go down.

Robo-adviser platforms
If you’re either new to stocks and shares, or just want someone to do all the hard work for you, a robo-adviser platform could be the right choice for you. Robo-adviser platforms don’t do all the work for free though, so you’ll be charged for both the platform and the management of your funds. Simply put, you supply the money, and they supply the research and make the decisions on where to invest. This can be very useful, and potentially profitable, but you need to accept that it’s largely out of your hands. If an investment doesn’t work out, blaming the platform won’t get your money back.

However, you can tailor your account to fit your personality, giving it licence to take greater risks, or play a more conservative long game. The platform of your choice will assess your appetite for risk, and then make decisions accordingly.

ISA allowances explained

There’s a limit on the amount you can invest for each tax year – 6 April to 5 April. This is called an annual ISA allowance. Your allowance is the amount of money you can pay into your ISA in each tax year, not the total value of your investments.

The ISA allowance for the 2023/2024 tax year is £20,000 - the same as the year before. You can choose to invest a lump sum or add small amounts to your account over the course of the tax year. Just be aware that if you put your whole allowance in a stocks & shares ISA and it goes down in value, you won’t be able to top it up again until the next tax year. However, if it goes up in value, you won’t need to pay any income tax, dividend tax or capital gains tax.

You can also split the allowance across different ISAs if you have them – for example, you could put £10,000 in a stocks & shares ISA, £5,000 in a cash ISA and £5,000 in a lifetime ISA. You can’t add money to two ISAs of the same type in the same tax year.

At the end of the tax year, if you haven’t invested your full ISA allowance, the remainder will expire – so you can’t roll it over into the next tax year.

Top tip

Stocks & shares ISAs can go up and down in value, so never invest more than you can afford to lose.

What are the risks of a stocks & shares ISA?

The value of investments you put into a stocks & shares ISA can go up and down, so the main risk is that you’ll get less back than you put in. This can also depend on the type of investments you’ve made.

Stocks & shares ISAs are most suitable if you can leave your money in them for at least five years. The idea is that, over time, your investments can ride out the ups and downs of the stock market. So if you think you’ll need quick access to cash, they’re not for you. An instant access cash ISA might be more suitable.

Protection through the Financial Services Compensation Scheme

The Financial Services Compensation Scheme (FSCS) is designed to protect your money. It applies to any and all banks or financial organisations that are regulated by the Financial Conduct Authority (FCA), protecting your money if a provider collapses. Under the FSCS, you’ll be able to protect deposits worth up to £85,000. If you’re investing more than this, you might want to consider spreading your money between different account providers to protect your money. Any accounts with more than £85,000 would lose anything over this amount, if the account provider went bust.

Are there any charges on a stocks & shares ISA?

Fees can vary between providers, but could include:

  • An account/platform fee The platform is where your investments are held in one place. The charge for keeping your account there could be a flat fee or a percentage of the value of your investments held in that account. So, if you’re investing large amounts, it’s best to look for a flat fee.
  • Fund management charge A fee that fund managers charge for looking after your investments – also known as an annual management fee. Some will charge a flat fee, which can vary, while others will charge a percentage fee. If it’s percentage based, expect an annual fee of up to 1%.
  • Trading fee Either a percentage or a flat fee every time you buy or sell shares on the investment platform.
  • Transfer fee Some providers charge a fee if you move your stocks & shares ISA to another provider.

When shopping around to find the best stocks & shares ISA for you, it’s a good idea to compare the different fees and charges for each platform.

Is a stocks & shares ISA right for me?

A stocks & shares ISA could be an investment option if:

  • You don’t want to pay tax on any profits you make
  • You don’t need instant access to the money and are happy to invest it for at least five years
  • You accept the fact that the value of your shares can go up or down
  • You have enough savings put aside for rainy days, so you don’t have to dip into your investments

If you’re not sure if a stocks & shares ISA is right for you, we recommend speaking to an independent financial adviser before proceeding.

How do I open a stocks & shares ISA?

You can open a stocks & shares ISA:

  • through an ISA provider, such as your bank
  • directly through a fund manager
  • through a financial adviser
  • through an online share account

To be eligible for an ISA you need to be aged 18 or over and a UK resident.

Frequently asked questions

What are the benefits of a stocks & shares ISA?

  • There’s the potential for higher returns than with savings accounts, but there’s also more risk involved.
  • All the profits you could earn on your investments will be tax-free, including capital gains and dividends. 

What happens to any income I make from a stocks & shares ISA?

That’s up to you. You can either withdraw the money, keep it as cash in your bank account or re-invest it into your ISA. The important thing to know is that you won’t have to pay any income tax, dividend tax or capital gains tax on any of your earnings, as long as they’re part of your stocks and shares ISA.

What is the difference between cash ISAs and stocks and shares ISAs?

The main difference between a cash ISA and a stocks and shares ISA, is that they’re a different type of investment. While they’re both ISAs, a cash ISA is more like a traditional savings account, a place to store your money and watch it grow with a certain level of interest. While these interest rates may vary, it ensures guaranteed growth. A stocks and shares ISA however, relies on the stock market to see a return. The account provider will be helping you manage your money and invest it in various shares, bonds and trusts, but those investments are as vulnerable as anything else on the stock market. You could see growth or decline. While stocks and shares ISAs are considered higher risk than a standard cash ISA, the rewards on offer can be greater, depending on the performance of your investments.

What is the cheapest way to open a stocks and shares ISA?

While you can go directly through the banks or building societies, the cheapest way to open a stocks and shares ISA is usually through an online platform. This way, you can choose between different stocks and shares ISA providers, based on the fees they may charge you for the account and fund management. This can make finding the “cheapest” one a bit tricky, as you’re being charge for both. This could also be a flat fee or percentage based. Percentage based fees are then more expensive for people investing larger amounts, so these people should look for flat-fee accounts. So, make sure you’re comparing both the platform/account fees, as well as the fund management, because both can make a big difference. It’s the right combination that you’ll need.

Can I transfer my stocks and shares ISA?

If you want to move your stocks & shares ISA to another provider, you have to arrange a transfer rather than cashing in and reinvesting in a new ISA. Just be aware that while all providers must allow you to transfer out, they don’t have to accept a transfer in – so make sure your new provider accepts you first.

Can I transfer from a stocks and shares ISA to a cash ISA?

If your financial situation changes, or if you just want to take less of a risk, you can transfer the money from a stocks and shares ISA into a cash ISA. Like with any other ISA transfer though, don’t just withdraw your money and then open a new cash ISA. If you do this, you’ll lose all the tax benefits. Instead, you’ll want to contact your ISA provider and let them know you want to make the switch. You’ll need to fill out an ISA transfer form, and, if you’re moving to a new ISA provider, you might need to pay a fee for closing you’re account. Once you’ve done your bit, the transfer should go through in no more than a few weeks.

How can I research my investments?

If you’re looking to do some research to try and make the best decisions, there are plenty of free sites that can help you break down what you’ll need to know, before making your first investment. Here are a couple of examples which have lots of useful information and guides that you can use:

  • Hargreaves Lansdown – with advice specifically designed for first-time investors, you can start with the basics or throw yourself in to the juicy stuff. You’ll also find video guides and checklists, all to help you understand how stocks and shares ISAs work, and how to make the most of them.
  • Interactive Investor – a great tool for DIY investment, Interactive Investor can help you choose your investments and answer many of the common questions associated with stocks and shares ISAs.

How do stocks and shares ISAs get taxed?

To be brief, they don’t get taxed. Firstly, you won’t need to pay any income tax on the money you earn through your investments, so long as your money is secured in your ISA. Secondly, any dividends you receive from your shares will also be exempt from tax, even if they go beyond the usual dividend allowance you’d expect, outside of an ISA. Finally, if you sell off any assets (shares etc.) from your ISA account, you won’t be subject to capital gains tax either, which means all three of these tax benefits make a stocks and shares ISA very tax efficient.

How long should I invest in a stocks and shares ISA for?

A stocks & shares ISA should be seen as a medium to long-term investment. Once you open an account, most providers advise you should be prepared to invest for at least five years. It’s important to know that stocks & shares ISAs can go up or down in value, so you might not get back what you originally invested.

Are stocks and shares ISAs safe?

Stocks and shares ISAs are a bigger risk than other types of ISA, because they involve investment. Any form of investment can be a risk, because you can’t be guaranteed that the value of the shares your ISA is invested in will see a return or increase in value. So, while the ISA account itself is relatively safe, the stocks and shares are open to the same risks as any other investment. So, if you’re looking for a safer investment, a cash ISA may be a better choice for you.

The stocks and shares ISA itself will, however, be protected by the Financial Services Compensation Scheme. This means, if your stocks and shares ISA provider were to collapse, your account would be protected up to the value of £85,000. Anything more than this would be lost. So, if you’re looking to invest more than this, you may want to spread your money between different account providers.

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