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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 2021-22? 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 bonds and gilts.

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 2021-22?

    During the 2021-22 tax year, which runs from 6 April 2021 to 5 April 2022, you can place up to £20,000 into an Isa. This is the same Isa allowance as the 2020-21 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.

    Each year, Which? surveys more than 1,000 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 or financial adviser and, if you're buying funds, 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 don't 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.

    In the 2021-22 tax year, the dividend allowance will be £2,000 (the same level as in the 2020-21 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.

    As the first £2,000 of dividends in any account are tax-free, you may not need 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 2021-22.

     

    Capital gains tax (CGT)

     

    Everyone in the UK has an annual capital gains tax-free allowance. 

    The capital gains allowance for the 2021-22 tax year is £12,300, unchanged from the previous tax year.

    Above this you'll pay 10% on asset gains as a basic-rate taxpayer, and 20% as a higher or additional-rate taxpayer.

    Assets in stocks and shares Isas aren't subject to CGT.

    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.

    But as your CGT allowance may be needed for other reasons (such as selling an investment property), keeping assets in stocks and shares Isas makes sense.

    Find out more: tax on savings and investments

     

    Income tax

     

    You may have to pay income tax on the interest paid by some types of investments, such as bonds and some types of funds.

    As with savings interest, basic-rate taxpayers can earn up to £1,000 tax-free per tax year via the personal savings allowance. Higher-rate taxpayers can earn £500 tax-free; additional-rate taxpayers don't get an allowance.

    Keeping investments in an Isa means you don't have to pay any income tax on the proceeds.

     It also means that your income from dividends, interest and capital gains won't count towards your overall income tax band.

    Stocks and shares Isas don't shield your investments from inheritance tax or stamp duty when buying shares.

    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 holding your investments that's covered.

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