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Stocks and shares ISAs

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

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

Written by
Alex Hasty
Insurance comparison and finance expert
Last Updated
20 FEBRUARY 2024
7 min read
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What is a stocks and shares ISA?

A stocks and 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 and shares ISA is that you won’t have to pay tax on the money you earn from your investments.

You can’t compare stocks and shares ISAs with Compare the Market. We recommend you get independent financial advice before opening an account.

How do stocks and shares ISAs work?

If you open a stocks and shares ISA, you can either choose which investments you want to put in it by doing your own research or put money into a ready-made portfolio of investments managed by an expert.

Stocks and shares ISAs are offered by various financial institutions, including banks, fund management companies and online investment platforms. The provider you choose may depend on how actively involved you want to be and the fees they charge.

As of 6 April 2024, you’re allowed to open and add money to more than one stocks and shares ISA in the same tax year. This could be helpful if you want one portfolio for long-term investments and one for more frequent buying and selling. It could also be helpful if you want to invest in an index fund with one provider and an actively managed fund with another.

If you’re new to investing, it’s a good idea to familiarise yourself with the basics of stocks and shares before parting with your money.

How much can you pay into a stocks and shares ISA?

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

The ISA allowance for the 2023/2024 and 2024/2025 tax years is £20,000. You can choose to invest a lump sum or drip-feed regular amounts into your ISAs over the year. Just be aware that if you put your whole allowance in a stocks and 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 and shares ISA, £6,000 in a cash ISA and £4,000 in a lifetime ISA.

If you’re saving for your child, you could open a junior stocks and shares ISA in their name and pay in up to £9,000 in each 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.

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

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 and know what they’re doing. If you’re happy to put in the time to research and learn 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 funds).

You 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, you’ll be responsible for your own successes and any failures.

Robo-adviser platforms

If you’re new to stocks and shares or just want someone to do all the hard work for you, a robo-fund or robo-adviser platform could be the right choice for you.

You’ll be asked to complete 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.

The hope is that it will be 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.

Robo-adviser platforms don’t do all the work for free but because they’re mainly automated, based on computer algorithms, fees can be low.

What are the risks of a stocks and shares ISA?

The value of investments you put into a stocks and 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 and shares ISAs are most suitable if you can leave your money in them for at least five years and potentially longer. 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 all banks and financial organisations that are regulated by the Financial Conduct Authority (FCA), protecting your money if a provider collapses.

Under the FSCS, you’re able to protect investments worth up to £85,000 per financial institution. If you have more than this invested, you might want to consider spreading your money between different account providers to protect it. However, the FSCS won’t protect you against investment losses caused by poorly performing shares.

What are the charges on a stocks and shares ISA?

Fees can vary among 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 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 and shares ISA to another provider.

When shopping around to find the best stocks and 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 and 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 and shares ISA is right for you, we recommend speaking to an independent financial adviser before proceeding.

How do I open a stocks and shares ISA?

You can open a stocks and 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 and shares ISA?

With a stocks and 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 and shares ISA?

You can either withdraw the money, keep it as cash in your ISA account or reinvest it. 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’s the difference between cash ISAs, and stocks and shares ISAs?

A cash ISA is more like a traditional savings account: a safe place to store your money and watch it grow with a certain level of interest. While the interest rates may vary, it ensures guaranteed growth.

A stocks and shares ISA, however, relies on the stock market to see a return and comes with more risk than a standard cash ISA. While the rewards on offer can be greater, this type of investment can lose money as well as grow.

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

While you can go directly through 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.

Make sure you’re comparing both the platform/account fees, as well as the fund management, because both can make a big difference.

Can I transfer my stocks and shares ISA?

If you want to move your stocks and shares ISA to another provider, you’ll 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. As 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, 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 your account. The transfer should go through within 30 days. Not all cash ISAs accept transfers in, so check first.

How can I research my investments?

Start by reading MoneyHelper’s Beginner’s guide to investing. There are also plenty of free sites that have a wealth of useful information on companies traded on the stock market to help with your research.

  • Hargreaves Lansdown has advice specifically designed for first-time investors. 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 can help you choose your investments and answer many of the common questions associated with stocks and shares ISAs.
  • AJ Bell has an article all about how to do investment research.

How do stocks and shares ISAs get taxed?

To be brief, ISAs 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 and so on) 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 and 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 and 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. One way to mitigate risk is by spreading your investments across a range of shares, funds and bonds.

The stocks and shares ISA itself will 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.

The content written in this article is for information purposes only and should not be taken as financial advice. If you require support on the products discussed here, please speak to your bank/lender or seek the advice of an independent professional financial advisor. We also have more information on our Customer Support Hub.

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Alex Hasty - Insurance comparison and finance expert

At Compare the Market, Alex has had roles as Commercial Associate Director, Director of Trading and Director of Growth. He’s currently responsible for the development and execution of Comparethemarket’s longer-term strategic options, ensuring the right breadth of products and services that meet customer needs.

Learn more about Alex