Cookies at Which? We use cookies to help improve our sites. If you continue, we'll assume that you're happy to accept our cookies. Find out more about cookies

What is a stocks and shares Isa?

By Michael Trudeau

Put us to the test

Our Test Labs compare features and prices on a range of products. Try Which? to unlock our reviews. You'll instantly be able to compare our test scores, so you can make sure you don't get stuck with a Don't Buy.

What is a stocks and shares Isa?

Stocks and shares Isas offer the possibility of higher returns than cash Isas, but only if you're happy to take some risks with your savings.

While a cash Isa is simply a tax-free savings account, a stocks and shares Isa is a tax-efficient investment account that lets you put money into range of different investments, including unit trusts, open-ended investment companies (Oeics) and investment trusts, as well as government bonds and corporate bonds. 

You can also buy individual company shares and put them into your Isa. 

So, unlike with cash Isas, you should only invest if you're prepared to take the risk that your investments can go down, as well as up, in value.

Find out more: Understanding investment risk – how to make sure you take the right level of risk for you.

How much can you invest in a stocks and shares Isa?

During the 2017/18 tax year, which runs from 6 April 2017 to 5 April 2018, you can place up to £20,000 into an Isa. This is a substantial rise from the £15,240 limit in the 2016/17 tax year.

It is possible to split your Isa allowance between several different types of Isa 'wrapper', including cash and stocks and shares, using whatever balance you prefer. The ratio of cash to stocks and shares is up to you. As of April 2016, you can also put money into an 'innovative finance' Isa for peer-to-peer loans, although few such products are available at time of writing.

Find out more: Stocks and shares Isa providers – our unique ratings for the top fund supermarkets.  

The tax advantages of stocks and shares Isas

The tax advantages of stocks and shares Isas can be significant, especially if you're a higher or additional-rate taxpayer. 

Stocks and shares Isas: tax advantages for basic-rate taxpayers

Dividend income

If you buy shares, or collective investments such as unit trusts that invest in a portfolio of shares for you, you're likely to receive dividends. Previously, these would be paid with 10% tax deducted at source. It wasn't not possible to reclaim this tax, which is why it was not quite true to say that stocks and shares Isas were 'tax-free'. 

Starting in the 2016/17 tax year, the 10% deduction was abolished. Investors instead receive a £5,000 allowance, meaning that the first £5,000 of dividend income will be tax-free. After this, dividends will be taxed at 7.5% for basic-rate taxpayers.

The £5,000 allowance applies for the 2016/17 and 2017/18 tax years. From April 2018, the dividend allowance will fall by more than half to £2,000.

However, any investments kept in a stocks and shares Isa will avoid tax on dividends altogether.

Because the first £5,000 of dividends are paid tax-free (£2,000 from April 2018) regardless of whether or not they are inside an Isa, this removes one of the advantages of a stocks and shares Isa for anyone who earns less than that in dividends in a given tax year. 

In fact it's likely you would have to have more than £100,000 invested before you began to exceed this amount, although dividend yields can vary.

Find out more: Dividend tax

Capital gains

Any capital gains you make from investments in a stocks and shares Isa are tax-free. However, everyone in the UK has an annual capital gains allowance, which is £11,100 for the 2016/17 tax year (£11,300 for 2017/18), so a stocks and shares Isa will only offer a capital gains tax benefit if you realise gains in excess of this allowance in a single tax year. 

And keep in mind that capital gains are only payable when you sell your shares for a profit, not if they simply increase in value.

Interest

If you invest in interest-bearing investments, such as corporate bonds and gilts in your stocks and shares Isa, interest is paid tax-free, meaning a saving of 20% tax for a basic-rate taxpayer.  

Stocks and shares Isas: tax advantages for higher and additional-rate taxpayers

Dividend income

If you earn dividends of more than £5,000 from your investments outside an Isa, you will pay tax of 32.5% if you're a higher-rate taxpayer and 38.1% if you're an additional-rate taxpayer. You will avoid having to pay this if your assets are within an Isa wrapper.

Capital gains

For higher and additional-rate taxpayers, the capital gains tax benefit is the same as for basic-rate taxpayers.

Interest

If you invest in interest-bearing investments, such as corporate bonds and gilts in your stocks and shares Isa, interest is paid tax-free, meaning a saving of 40% for higher-rate taxpayers and a saving of 45% for additional-rate taxpayers.

Find out more: Tax on savings and investments – the comprehensive Which? guide.

Charges for investing in a stocks and shares Isa

The costs of investing within a stocks and shares Isa will vary, depending on what you invest in and which provider you use, but charges aren't usually any higher than those you'd pay if you invested outside an Isa.

Many investors who are happy to make their own investment decisions without advice opt to use a fund supermarket for their stocks and shares Isa investments. These services, which allow you to access a vast range of investments, levy either an annual percentage charge based on the value of your investments or a fixed fee in pounds and pence.

Some of the investments that you might place into a stocks and shares Isa, such as unit trusts and Oeics, also come with ongoing charges.

Transferring between stocks and shares Isa providers 

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

If you already have a stocks and shares Isa and want to transfer it to a new provider or convert it to a cash Isa, you can do so, but you'll need to contact your new provider and complete a transfer form.

Find out more: Stocks and shares Isa transfers – how to move your Isa to a new provider

  • Last updated: April 2017
  • Updated by: Michael Trudeau
SHARE THIS PAGE

Which? Limited (registered in England and Wales number 00677665) is an Introducer Appointed Representative of Which? Financial Services Limited (registered in England and Wales number 07239342). Which? Financial Services Limited is authorised and regulated by the Financial Conduct Authority (FRN 527029). Which? Mortgage Advisers and Which? Money Compare are trading names of Which? Financial Services Limited. Registered office: 2 Marylebone Road, London NW1 4DF.