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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 2019-20? What are the tax advantages of stocks and shares Isas?
Charges for investing in a stocks and shares Isa Transferring between stocks and shares Isa providers

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 2019-20?

During the 2019-20 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 2018-19 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. 

Dividend income

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 2019-20 tax year, the dividend allowance will be £2,000 (the same level as in the 2018-19 tax year), which means you can earn £2,000 before paying tax.

A £5,000 allowance applied to the 2016-17 and 2017-18 tax years.

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 2019-20.

Capital gains

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 2019-20 tax year is £12,000. This has been increased from the 2018-19 tax year when the capital gains allowance was £11,700.

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.

Interest

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

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