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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.

In this article
What is a stocks and shares Isa? What is the stocks and shares Isa allowance in 2020-21? Which stocks and shares Isa should I pick?
How much does a stocks and shares Isa cost? What are the tax advantages of stocks and shares Isas? Are stocks and shares Isas safe?

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 individual shares, investment fundsinvestment trusts, as well as government bonds and corporate bonds.

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.

 

    What is the stocks and shares Isa allowance in 2020-21?

    During the 2020-21 tax year, which runs from 6 April 2019 to 5 April 2020, you can place up to £20,000 into an Isa. This is the same Isa allowance as the 2019-20 tax year.

    It is possible to split your Isa allowance between several different types of Isa 'wrapper':

    If you have existing Isas, they do not contribute towards your current Isa allowance.

    You can transfer existing cash Isas and stocks and shares Isas into a new stocks and shares Isa, without affecting your allowance. However, you can only open one type of each Isa per year: so one cash Isa, stocks and shares Isa etc.

    Furthermore, you're restricted to paying into one Isa of each type - so if you have two stocks and shares Isas then pick one to contribute to.

    Which stocks and shares Isa should I pick?

    When selecting a stocks and shares Isa, consider the choice of investments available through the provider, its customer service and the fees you'll have to pay (more on fees below).

    Each year, Which? surveys over a thousand customers of investment platforms, which provide stocks and shares Isas.

    We ask customers about everything from customer services to investment information and value for money.

    We also analyse provider fees for different sizes of portfolio. We then pick Which? Recommended Providers, based on a combination of customer scores and fees.

    How much does a stocks and shares Isa cost?

    Stocks and shares Isas don't usually cost any more than general investment accounts.

    You'll pay two sets of charges: those set by the investment platforms and those levied by individual fund managers.

    Fees matter, because they apply whether or not your investments perform well, as our graph demonstrates:

    Not all investment platforms levy a percentage charge: some levy flat fees, fees for trading, or a combination of all of these.

    Some platforms also charge for transferring out your stocks and shares Isa to a different provider.

    We've compared the fees of leading investment platforms over eight different portfolio sizes, so you can find the cheapest platform for you.

    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. 

    Keeping investments in a stocks and shares Isa means you do not have to pay the following taxes:

     

    Dividend tax

     

    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'. 

    In the 2020-21 tax year, the dividend allowance will be £2,000 (the same level as in the 2019-20 tax year), which means you can earn £2,000 before paying tax.

    For earnings above the allowance, dividends will be taxed at 7.5% for basic-rate taxpayers. Higher and additional-rate taxpayers pay 32.5% and 38.1%, respectively. 

    Any investments kept in a stocks and shares Isa will avoid tax on dividends altogether.

    Then again, the first £2,000 of dividends in any account are tax-free, so you may not benefit from an Isa if you earn less than this. 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 2020-21.

     

    Capital gains tax

     

    Everyone in the UK has an annual capital gains allowance. 

    The capital gains allowance for the 2020-21 tax year is £12,300. This has been increased from the 2019-20 tax year when the capital gains allowance was £12,300.

    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.

    Find out more: Tax on savings and investments

    Stocks and shares Isas do not shield your investments from inheritance tax.

    If you move existing investments into an Isa, this could trigger a capital gains tax charge.

    This is because the Isa provider has to briefly sell your investments before re-purchasing them within the Isa.

    Whether you'll have to pay capital gains tax depends on whether your investments have increased in value since you bought them, and if you'd used up your capital gains allowance.

    Are stocks and shares Isas safe?

    All investing involves the risk of losing your money - any 'guaranteed' or 'risk-free' investment could be a scam.

    If you don't want to take any risks, a cash Isa, lifetime cash Isa or savings account may be more suitable.

    Within investments, however, there's a wide variety of assets, some carrying more risk (and potential for reward) than others. You can read more about understanding risk here.

    FSCS protection

    Check that your stocks and shares Isa provider is covered by the Financial Services Compensation Scheme (FSCS).

    This means that, should your stocks and shares provider collapse, up to £85,000 of your investments will be protected.

    It's likely that your investments will be kept separately (ring-fenced) from the Isa provider's assets, protecting sums above £85,000, although you should check this.

    Bear in mind that this £85,000 protection doesn't cover losses from your actual investments - it's the company that's holding your investments that is covered.

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