Stocks and shares Isas explained How 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 (OEICs - 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 £11,280 in the current tax year in a stocks and shares Isa. 

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Tax

Unlike a cash Isa, stocks and shares Isas aren't completely tax-free. Buying share-based investments (such as unit trusts and OEICs) 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.

How much can you save?

From 6 April 2012, everyone gets the new overall allowance of £11,280 

New annual allowances each year

Allowances 

Since 6 April 2012, every adult has an overall allowance of £11,280 each tax year. You can invest a maximum of £5,640 of your allowance in a cash Isa. 

So you could either invest the full £11,280 in a stocks and shares Isa, or invest up to £5,640 in a cash Isa and, if you choose, invest the remaining £5,640 of your allowance in a stocks and shares Isa.  

Annual allowances will now rise with Retail Prices Index (RPI) inflation. The current limit has been increased by £600, from £10,680 in 2011/12 to £11,280 in 2012/13

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 can also transfer your current year's cash Isa to a stocks and shares Isa, provided you transfer the whole amount.