What is a stocks and shares ISA?

How does a stocks and shares ISA work?

A stocks and shares ISA is an account where you can invest up to a certain amount each year (the ISA annual allowance), without having to pay tax on any gains you make.

Investing in an ISA means that any investment gains you make are free from income tax and capital gains tax. You also don’t have to pay any tax when you withdraw money from an ISA.

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

The current ISA allowance is £20,000 each tax year. This is the maximum you can pay into all types of ISA: cash, stocks and shares, innovative finance and lifetime. (The maximum you can pay into a lifetime ISA each tax year is £4,000, but it still counts towards your total £20,000 limit.) 
 
You can contribute to multiple types of ISAs – or even more than one of the same type of ISA – as long as the total you pay into every ISA you have isn’t more than £20,000 each tax year. 

Who can open a stocks and shares ISA?

To open a stocks and shares ISA, you must: 

• Be at least 18 years old
• Be a UK resident for tax purposes (or a ‘Crown Servant’ working outside the UK, such as a diplomat or overseas civil servant, or a spouse/civil partner of a Crown Servant)
• Have not already contributed £20,000 to an ISA or ISAs in the current tax year (which starts on 6 April and runs to 5 April the following year).

How do you choose ISA investments?

Many ISA providers offer investment options that are chosen and managed for you, if you'd rather not pick your own. Alternatively, you can select your own investments from a range of individual funds, either by yourself or with the help of a financial adviser.  
 
Some stocks and shares ISAs also give you the option to invest directly into individual shares and bonds, as well as more ‘exotic’ investments, a term that covers less typical investments such as farmland, vintage cars or wine. 

Benefits of a stocks and shares ISA

Here are some of the key benefits of a stocks and shares ISA. 

Tax efficiency

• You won’t pay income tax or capital gains tax on any investment gains made within the ISA
• You won’t pay any income tax or capital gains tax on any withdrawals you make from your ISA.

Tax treatment depends on individual circumstances and could change in the future.

Potential for higher returns than cash over the long term

• Over longer periods, investment returns will generally be higher than the interest on cash savings – especially if interest rates are low.
• Across these longer periods, the benefits of compounding really become apparent. Compounding is when any investment gains you make are reinvested, giving you the potential to achieve returns on your gains as well as on money you pay into your ISA.
• Inflation measures how fast prices are rising for the everyday goods and services we buy, such as food, petrol or a haircut. If the interest you earn on cash savings is less than the rate prices are going up by, then the value of your money is falling in real terms. Investing offers greater potential for your money to grow in value above the rate of inflation over the longer term so it can maintain its buying power.  

Investment flexibility

• Most stocks and shares ISAs offer a range of options, covering different types of investments.
• It’s common for providers to offer ready-made investment portfolios
• This means you can tailor your investments based on your risk appetite and goals. 

Is a stocks and shares ISA right for you?

As a stocks and shares ISA is an investment, it won’t necessarily be right for everyone. Here are some points to think about if you’re considering opening a stocks and shares ISA. 

• Investment risk

Unlike cash savings, market fluctuations can mean the value of your investments will go down as well as up. If you're uncomfortable taking any risk with your money, a stocks and shares ISA is unlikely to be suitable for you.

• Less suited to shorter-term savings goals

The potential for losses and lack of time for recovery over short periods, means investing is generally unsuitable for shorter-term goals. As a stocks and shares ISA is an investment, its value can go down as well as up. However, for longer periods, investing generally offers greater opportunity for growth than interest on cash savings.

• How long should you invest for?

Keeping your stocks and shares ISA invested for five years or more can give it the best opportunity to grow, but you're not locked in. If you need to take money out, you can do so at any time.

• Consider an emergency fund

The independent and government backed MoneyHelper service recommends having three to six months of outgoings saved for an emergency (opens in a new window). You may want to build up these savings before you invest.