Stocks and shares Isas explained What is a stocks and shares Isa?

What is a stocks and shares Isa?

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

A stocks and shares Isa is a tax-efficient investment account that lets you put money into different types of 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 are prepared to take the risk that your investments can go down as well as up in value.

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How much can you invest?

From the start of the 2014-15 tax year, the Isa allowance will increase to £11,880, of which up to £5,940 can be held in a cash Isa. 

However, from 1 July 2014, it will be possible to top up Isas for the 2014-15 tax year to a new limit of £15,000. And under new rules, it will be possible to split your Isa allowance between cash and stocks and shares with no maximum cash component. The ratio of cash to stocks and shares will be up to you.

The tax advantages of stocks and shares Isas

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 is £11,000 for the 2014-15 tax year.

So as long as you don't make gains of more than £11,000 in 2014-15, 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 37.5% 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.

Charges for investing in a stocks and shares Isa

The investments you place into a stocks and shares Isa can come with charges that are used to pay commission to financial advisers (although these have now been banned in relation to investments made since January 2013), cover admin costs and pay fund managers. 

Charges vary, depending on what you invest in, but aren't usually any higher than those you'd pay if you invested outside an Isa.

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.

If you already have a stocks and shares Isa and want to transfer it to a new provider, you can do so. You will need to contact your new provider and complete a transfer form.

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