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.
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 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':
If you have existing Isas, they do not contribute towards your current Isa allowance.
You can transfer existing cash and stocks and shares Isas into a new stocks and shares Isa.
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.
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.
We have however explained them, so you can decide whether you need a stocks and shares Isa.
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 tax
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.
- Find out more: Tax on savings and investments
Charges for investing in a stocks and shares Isa
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.
- Find out more: compare investment platform fees and charges
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