What is a stocks and shares Isa?
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.
These include 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.
What is the stocks and shares Isa allowance in 2018/19?
During the 2018/19 tax year, which runs from 6 April 2018 to 5 April 2019, you can place up to £20,000 into an Isa.
This is the same Isa allowance as the 2017/18 tax year and 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. Since 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.
What are 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.
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'.
From April 2018, the dividend allowance will be reduced ,by more than half, to £2,000.
In the 2016/17 tax year, investors received a £5,000 dividend 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.
Higher and additional-rate taxpayers pay 32.5% and 38.1% , repspectively.
The £5,000 allowance applied to the 2016/17 and 2017/18 tax years but has been reduced for the 2018/19 tax year.
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.
Use our dividend tax calculator to find out how much you'll pay in 2017-18
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.
The capital gains allowance for the 2018/19 tax year is £11,700. This has been increased from the 2017/18 tax year when the capital gains allowance was £11,300 - and the 2016/17 tax year when the allowance was £11,100.
Stocks and shares Isas 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.
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.
A saving of 40% for higher-rate taxpayers and 45% for additional-rate taxpayers is available in an Isa.
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.
See how much you could save by choosing an online fund supermarket.
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