Stocks and shares Isas explained What is a stocks and shares Isa
A stocks and shares Isa allows you to invest without having to pay tax
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 different types of investments, such as unit trusts, open-ended investment companies (OEICs - similar to unit trusts) and investment trusts, as well as government bonds 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 £11,520 in the current tax year in a stocks and shares Isa.
Action point: The Which? investment portfolios - we have a unique tool that helps you choose how much money you want to put at risk to build the right mix of investments for your needs.
Paying tax with a stocks and shares Isa
Buying share-based investments (such as unit trusts and OEICs) within an Isa is only likely to save you tax if you're earning income from your investments, or are likely to pay capital gains tax. Everyone in the UK has an annual capital gains allowance, which in 2013/14 stood at £10,900. So as long as you don't make any more than £10,900 of gains in a year, you'll have no tax to pay when you sell your investment, even if it's outside of an Isa.
If you earn dividends from your investments, outside of an Isa, you will pay tax of 32.5% if you're a higher rate taxpayer and 42.5% if you're an additional rate taxpayer - although 10% of this is automatically deducted before you receive the dividends.
If you're investing via an Isa, however, you will only pay 10% tax on the dividends - and won't have to pay any additional tax. Basic rate taxpayers also don't need to pay additional tax on dividends, regardless of whether they hold the assets within a stocks and shares Isa or not.
If you use your stocks and shares Isa to invest in interest-bearing investments, like corporate bonds and gilts, the interest is tax-free whatever tax band you fall into.
Action point: Tax on savings and investments - find out more about how investments are taxed.
Charges for investing in a stocks and shares Isa
The investments you place into a stocks and shares Isa 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.
Action point: Are fund charges eating into your returns? - get to grips with the charges you'll pay for investing
How much can you save?
Allowances
Since 6 April 2012, every adult has an overall allowance of £11,280 each tax year to invest in a stocks and shares Isa. 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.
- Call the Which? Money Helpline - if you have a stocks and shares Isa query
- The Which? investment portfolios - pick the right investment mix with our unique tool
- Fund supermarkets - how to buy investments for your stocks and shares Isa
