Stocks and shares ISAs: a simple guide - Times Money Mentor (2024)

If you want to invest as tax efficiently as possible, you might want to consider opening a stocks and shares ISA.

In the current 2023/24 tax year, you can invest up to £20,000 in a stocks and shares ISA without paying any dividend, capital gains or income tax.

In this article, we explain:

• How does a stocks and shares ISA work?
• How do you invest with a stocks and shares ISA?
• What are the stocks and shares ISA rules that you need to follow?
• What are the benefits of a stocks and shares ISA?
• Is a cash ISA better than a stocks and shares ISA?

Related content: Guide to ISAs: which ISA should I get?

ISA stands for individual savings account. It is a tax-efficient way to save or invest your money. Any growth your money makes inside the wrapper of an ISA is free from the taxman.

A stocks and shares ISA is particularly useful for sheltering investment returns. It means you don’t have to worry about income tax, capital gains tax or dividend tax on any profits you make.

Currently you can contribute up to £20,000 into ISAs in a given tax year. We explain more here about the rules and different types of ISA.

If you opt for a stocks and shares ISA, you can choose which investments to put inside. You can open one with a number of financial institutions including:

• Banks
• Stockbrokers
• Fund management companies
• Investment platforms

Look carefully at the fees and range of investments on offer before opening an ISA.

Some ISAs are better value for those with large amounts of money who want to buy and sell investments frequently. Others are best for smaller, less active investors.

Capital at Risk. All investments carry a varying degree of risk and it’s important you understand the nature of these. The value of your investments can go down as well as up and you may get back less than you put in.

There are some rules you should be aware of before opening a stocks and shares ISA:

• You have to be 18 or over and a UK resident to open one, though adults can open Junior ISAs for minors
• You currently get an allowance of £20,000 each tax year (2023/24)
• The allowance can’t be carried forward to the next tax year, so use it or lose it
• You can only pay into one of each type of ISA during any given tax year, so you won’t be able to contribute into two stocks and shares ISAs in 2023/24

How to invest with an ISA

Broadly speaking, there are two ways of investing with a stocks and shares ISA:

• If you prefer to choose the investments yourself, a self-invested stocks and shares ISA may be a better fit. Find out which providers are the best for DIY investment ISAs.
• You can opt instead for a ready-made stocks and shares ISA where an expert or “robo-adviser” picks and chooses the investments for you. We also list the top ready-made investment ISAs.

You can either start investing in a stocks and shares ISA by:

• Drip-feeding your money in bit by bit
• Or contributing a lump sum

By drip-feeding money in over time you can benefit from something known as pound-cost averaging. We explain more about this in our beginner’s guide to investing.

The big advantage of any ISA is that they shelter your money from tax:

• No income tax to pay on any profits you make
• You don’t have to worry about paying dividend tax
• Profits are free from capital gains tax
• You don’t have to declare profits on your tax return, saving you time.

The only tax that you may have to pay in an ISA is stamp duty charged at 0.5% when you buy shares worth more than £10,000. Find out more about how shares are taxed here.

Your investments will also be safe if the government decides to cut the tax-free allowances for capital gains, dividends or interest.

Check out this page on self-invested stocks and shares ISAs to see which providers are highly rated by us.

How are investments that are not inside an ISA taxed?

Any investments that are held outside an ISA may be liable for income tax, capital gains tax or dividend tax.

Here are the thresholds for the 2023/24 tax year:

Capital gains tax

No capital gains tax to pay on the sale of assets such as shares or an investment property up to a profit threshold of £6000 (down from £12,300 in 2023/24 tax year).

We have a guide on capital gains tax.

Dividend tax

• Basic-rate taxpayers pay dividend tax at a rate of 8.75%
• Higher-rate taxpayers pay 33.75%
• Additional-rate taxpayers pay 39.35%

You can earn up to £1,000 tax free from dividends (down from £2,000 in the 2023/24 tax year). Above this the amount you pay in tax depends on how much you earn:

Income tax

The introduction of the personal savings allowances means cash ISAs aren’t as popular as they once were.

This allowance means that:

• Basic-rate taxpayers can earn up to £1,000 in interest payments before having to pay income tax
• Higher-rate taxpayers can earn £500
• Additional rate taxpayers don’t get a personal savings allowance

If you decide you want to open a stocks and shares ISA,we list the best ones for DIY and ready-made portfolios.

Will I make money with a stocks and shares ISA?

There are no guarantees that you will make money by investing in a stocks and shares ISA.

With that said, if you invest in a diverse range of investments and remain invested for the long term, there is a high probability that you will have made money on at least some of those assets.

If your investments are successful, over time, you should be able to earn more than you would through a savings account.

Try out the Wealthify calculator below to get an idea of how much money you could earn if your investments are successful.

Bear in mind that other investment platforms will have different styles and levels of risk, so the categories below only apply to Wealthify products. Also remember there are also no guarantees when it comes to investing, so you could lose money too.

Can I lose all my money?

Yes, because your capital is at risk. But you only really crystallise a loss if you sell your investment for less than you bought it for or the company goes bust.

Here are some tips to consider:

• Invest in an ISA for the long term: If you don’t sell, the loss hasn’t been “crystallised”. If you leave your lump sum invested, your investment account might start to increase, so don’t panic if things go south over a short timeframe.

• Spread your risk: By investing across lots of different asset classes. You also reduce the risk of losing all your money because when one investment moves down, another is likely to be moving up.

Find out more about the basics of investing in our beginner’s guide to investing.

Yes, you can open a new stocks and shares ISA with a different provider every year if you wish. But you can only pay into one stocks and shares ISA during each tax year.

So for example:

• If you opened a stocks and shares ISA in a previous tax year, you could open another stocks and shares ISA in the current tax year.
• But you are only allowed to contribute into one of them in any one tax year, so you would have to choose between them. If you transfer money between ISAs, this doesn’t count as a contribution.

The same applies to other types of ISA too: so you can only open one of the same type in any one tax year. And you can only contribute into one of the same type of ISA in a single financial year.

ISA transfers are really simple, just contact the new provider and fill out an ISA transfer form. The provider will do the rest.

Transfers should take no longer than:

• 15 working days for cash ISAs
• Or 30 calendar days for a stocks and shares ISAs

When you transfer a stocks and shares ISA you have two options:

• “In-specie” transfer – Opt to leave your investments untouched as long as the new provider offers access to the funds and shares you own, meaning you don’t miss out on any investment gains during the switching process
• Sell your investments and move the cash across – This means you will have to select investments through your new provider

NOTE: in-specie transfers are typically more expensive than cash transfers. Some providers charge a fee for each investment you hold so do your homework first.

Whatever you do, avoid just withdrawing your cash and closing your account as you’ll lose the tax-free total that you have built up in previous years.

When you reinvest your money it will eat into your current year’s allowance.

You can currently save up to £20,000 each tax year, known as the ISA allowance.

This allowance can be shared around different types of ISA but not two of the same type.

NOTE: the Lifetime ISA has a £4,000 limit and this counts as part of your total £20,000 allowance, leaving you £16,000 to share among your other ISAs.

You could have a stocks and shares Lifetime ISA and a regular investment ISA as these are considered different types.

Unlike a cash ISA, which is normally free, there are costs involved with a stocks and shares ISA.

You will pay various fees when holding an investment ISA. These are to cover market research and management costs, and dealing charges.

Below are some of the fees to expect.

Platform fees

These are charged by the investment platforms you use to buy and sell shares, and the fees help them cover the cost of running your account.

They will either take the form of:

• A percentage of the amount you have invested in your portfolio, such as 0.35% annually
• Or a flat monthly fee, such as £9.99 a month.

If you have a large investment portfolio, a flat fee might work out as cheaper.

Fund management charges

These are paid in addition to platform fees, and cover expenses that come with managing an investment fund. They are typically charged as an annual percentage of your portfolio.

Management charges can be as low as 0.1% for a passive tracker fund where the returns simply mimic the performance of a stock market index.

This is instead of a fund employing an “active” manager looking to pick certain shares with a view to beating the market.

Buying and selling charges

Many providers will charge a fee every time you buy or sell an investment. This is often known as dealing charges.

Providers have a wide range of charges which depend on the type of investment.

For example, AJ Bell* charges:

• £1.50 to trade funds
• £9.95 for shares

Some platforms offer regular-dealing discounts – so if you buy or sell a certain number of times a month, the cost falls.

Transfer-out fee

Some platforms will charge a fee for switching to another provider. But many do not impose an exit fee.

It’s vital to understand the fees that you are paying as they really do eat into your returns and could scupper your financial goals. Check out our article on the impact of fees on investment returns.

What can I invest in?

Your choice of investment depends on the company you choose to open the ISA with.

Most investment platforms have lots of choice of different types of asset. For example:

• Shares: you buy a tiny bit of a company on the stock market and so benefit from growth in that company – but if the business starts to struggle, the price of your share may fall.Find out how to choose investment funds.
• Bonds: effectively you lend money to companies or governments for a set period of time in return for interest payments
• Funds or investment trusts: your money is pooled with many other investors and used to buy into lots of different companies in the UK or worldwide. It is an easier way to spread risk rather than trying to buy lots of individual shares. Find out how to buy shares.

Is a cash ISA better than stocks and shares?

The answer to this question largely depends on when you want access to your money.

If you think you might need to access your savings account in less than five years or can’t afford to lose money, a cash ISA sounds likely to be a better option.

Alternatively, if you are happy to leave your money invested for the long term and are comfortable taking on some risk, you could start investing in a stocks and shares ISA instead.

But you don’t have to pick one or the other: you could keep your emergency buffer in a cash ISA and invest the rest in a stocks and shares one.

If you are still asking yourself whether you should invest in a cash ISA or a stocks and shares ISA, we compare them. Also fill in our survey below to find out which type might be best for you.

You also might want to read our simple guide on ISAs.

If you are fed up with the paltry interest rates on savings accounts, you might be ready to take some risk in the hunt for higher returns.

If you have lots of savings in a low interest rate account or in Premium Bonds, investing through a stocks and shares ISA can help you earn more from your money over time.

Note: you should be prepared to leave your lump sum invested for at least five years to ride out any short-term market wobbles.

As with all investing there are no guarantees that you will get your lump sum back so pick carefully.

Find out the best stocks and shares ISAs according to our independent ratings. Some providers offer ready-made portfolios while others are more suitable for DIY investors.

If you are keen to discover more about the basics of investing then check out our beginner’s guide to investing.

Before you open an investment ISA…

When you start investing, it’s a good idea to leave that money tied up for at least five years to give it the best chance of growing.

As you won’t have ready access to the cash, here are some things you should do first:

1. Pay off your debts

In general, it is better to pay off expensive debt before investing any spare savings.

For example, the interest rate on a credit card or overdraft tends to range between 20% and 40%, and it is unlikely that your investments would perform well enough to generate returns that beat this. 

A personal loan may come with a lower interest rate than a credit card or overdraft. The cheapest loans for £5,000 – £7,499 come from AIB (NI) at 5.6% REP APR and Sainbury’s Bank at 6.1%. Remember that not everyone will get these rates and you may be charged more.

But again, there are no guarantees your investments will do well.

2. Have a rainy day fund

It’s best not to put all your savings in the stock market.

Ideally, you need some cash set aside in accounts to which you can gain access easily in the event of an emergency or large, unexpected outlay – such as if you have to replace a broken boiler or you need a new car.

There is no set amount for how much you should have set aside in a rainy-day fund. But aiming for a savings pot of three to six months of outgoings is a good place to start. 

This should be enough to cover living expenses in the short term if, for example, you suddenly find yourself out of work.

3. Check your affordability

Investment ISAs are designed for long-term savings. Financial advisers say that, ideally, you should not withdraw the money for at least five years.

This will give your investment time to ride out any short-term troughs in the stock market and ensure you can take advantage of the good times to generate decent returns.

If you are wondering how much to invest in a stocks and shares ISA, there is no set answer as everyone’s financial circ*mstances will be different.

To be on the safe side, only put in what you can afford to lose.

If you want more help around this topic that’s tailored to your circ*mstances, Kellands* is offering all of our readers a free hour-long session* with one of its independent financial advisers. They can get a good idea of your financial goals, and help you take the first step to achieving them.

Investment ISAs, where you invest your savings in the stock market, could offer you the chance to make higher returns at a time when interest rates on cash ISAs and other savings accounts are at rock bottom.

However, returns are not guaranteed and you could make a loss if you withdraw your money at a time when markets are down.

Stocks and shares ISA tips

Stocks and shares ISAs account for around a fifth of new ISAs opened each year. Cash ISAs account for the majority of new openings, at around 75%.

Many people, therefore, are still wary of – or unfamiliar with – investment ISAs.

If you are at the start of your investment journey, here are some tips you can consider to help you make the most of a stocks and shares ISA.

1. Use your full allowance

If you can, it’s worth maxing out your ISA allowance each tax year to increase your chances of maximising your investment returns.

You cannot carry forward any unused ISA allowance into the next tax year. So either use it or lose it.

However, it should be stressed that you should not aim to hit the annual allowance of £20,000 at all costs. It is a high limit and many savers will probably not get close.

2. Choose a strategy that works for you

Think about your investment goals. Are you saving for a property, school fees or retirement?

This should help steer your attitude to risk because if you might need to get hold of the money within the next five years – to put down a house deposit, for example, or pay for a child’s education – then you might be better off with cash savings.

In contrast, the longer you are happy to keep your money invested, the higher your level of risk should be in pursuit of the higher returns more likely with an investment ISA.

Investment choices can be overwhelming. Find out more here about how to choose investments.

3. Invest for the long term

Investment ISAs are designed for the long-term savings.

Do not assume you can make a quick return; you may see the value of your account fall in the short term. There is even a chance it may never recover.

However, history shows us that money invested for the long term is likely to grow. US stocks have averaged 10-year returns of 9.2% over the past 140 years, according to investment bank Goldman Sachs.

A study from Barclays, which analyses stock market data since 1899, shows that £100 invested in 1899 would be worth £32,025 today (assuming the reinvestment of dividends).

4. Ignore trends

Seasoned investors will tell you not to follow the herd in which shares you buy, but instead to seek out your own opportunities with up-and-coming stocks.

However, the reality is that this is hard to achieve if you have limited time to research the stock market in depth.

Many savers will instead pay into an investment fund where managers look for opportunities on their behalf.

5. Diversify

For many people, the safest approach is to diversify as much as possible in the market sectors and individual companies that they hold as investments.

This could mean buying a share in a fund that invests in hundreds of companies – rather than leaving investors over-exposed to the fortunes of any one business or industry.

A mix of investments should help shelter your money during periods of stock market turbulence.