Stocks and shares Isas explainedHow they work

What is a stocks-and-shares Isa?

Stocks and shares Isas are riskier than cash Isas

Stocks and shares Isas are different from cash Isas – which are just tax-free savings accounts. 

A stocks and shares Isa lets you put money into a range of investments, such as unit trusts, open-ended investment companies (similar to unit trusts) and investment trusts, as well as government and corporate bonds. This means your investment can go down as well as up.

You can also buy individual shares and put them into an Isa – this is known as a self-select stocks and shares Isa. You can invest up to £7,200 in the current tax year in a stocks and shares Isa.

Tax

Unlike a cash Isa, stocks and shares Isas aren’t completely tax-free. Buying share-based investments (such as unit trusts and open-ended investment companies) through Isas saves you tax only if you’re a higher-rate taxpayer, or are likely to pay capital gains tax.

However, if you use your stocks and shares Isa to invest in interest-bearing investments, like corporate bonds, the interest is tax-free whatever tax band you fall into.

Charges

Stocks and shares Isas have charges that are used to pay commission to financial advisers, cover admin costs and pay fund managers. These vary, depending on what you invest in, but aren’t usually any higher than those you’d pay if you invested outside an Isa.

Isa rules from April 2008

From 6 April 2008, every adult has an overall allowance of £7,200 each tax year

The latest governmental changes came into force on 6 April 2008. Here’s how they affect you.

Allowances 

Every adult has an overall allowance of £7,200 each tax year. You can invest a maximum of £3,600 of your allowance in a cash Isa. 

So you could either invest the full £7,200 in a stocks and shares Isa, or invest up to £3,600 in a cash Isa and, if you choose, invest the remaining £3,600 of your allowance in a stocks and shares Isa.

Peps become Isas 

All Peps automatically became stocks and shares Isas and are subject to the Isa rules.

No more minis and maxis 

There are now just two types of Isa: cash Isas and stocks and shares Isas.

Transfers allowed 

You are able to transfer your previous years' cash Isas into stocks and shares Isas without affecting your current year's Isa allowance. You’ll can also transfer your current year’s cash Isa to a stocks and shares Isa, provided you transfer the whole amount.

Child trust fund accounts can become Isas 

When they mature, child trust funds can be rolled over into Isas.

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