Individual Savings Account (ISA)

Find out what ISA stands for

ISA is a term that pops up all the time. You might have heard it on TV or from your friend that loves to invest.

ISAs are tax-efficient accounts that are unique to the UK. The acronym stands for ‘individual savings account.’

There is a limit on how much money you can put into an ISA each year - this is called your ‘ISA allowance.’

In the 2019 - 2020 tax year, the ISA allowance was £20,000. So you could have put up to £20,000 in an ISA and any capital gains would have been tax-free.

There are several types of ISAs available to investors and many people will look at these to determine which is the best ISA for them.

Your £20,000 ISA allowance can be spread across one of each type of ISA. For example, you could hold £5,000 in a cash ISA and £15,000 in a stocks and shares ISA.

Freetrade offers a stocks and shares ISA account, so we’ll be talking about them in this post. ✌️

What is a stocks and shares ISA?

A stocks and shares ISA is an account that lets you invest a certain amount per year and, with some exceptions, have any gains remain tax-free.

Stocks and shares ISAs are often called ‘investment ISAs’ - so if you hear that term used, remember that they’re really the same thing.

You were allowed to invest up to £20,000 via a stocks and shares ISA for the most recent tax year. Any money that you made from those investments would have been tax-free.

For example, if you had bought shares for £500 and sold them at £600, you wouldn’t have to pay any tax on the £100 profit that you made.

Similarly, if you were paid £100 in dividends, you wouldn’t have to pay any tax on that money - unless the dividends were from US stocks.

Check how you can transfer your ISA to a Freetrade stocks and shares ISA account.

Are ISAs tax-free?

ISAs are often marketed as being completely tax-free. They are almost completely tax-free but there are some exceptions to the rule.

Firstly, you’ll still pay stamp duty on any shares that you purchase in an ISA.

Stamp duty is a tax that you pay when buying shares in the UK. Luckily it’s only 0.5 per cent, which means you’ll pay 50p in tax for every £100 that you invest.

Aside from stamp duty, you will also have to pay tax on any dividends you receive from US stocks that you hold in an ISA.

As long as you’ve filled in your W8-BEN form, the tax on US dividends is set at 15 per cent.

What is the best stocks and shares ISA?

Freetrade offers stocks and shares ISAs for just £3 a month.

We don’t charge any fees for holding your money, stocks or shares and, aside from FX fees, any instant trades you make will be commission-free.

In fact, it might just be the best investment ISA offering out there right now. But we’ll leave that for you to decide. 😉

Further resources on ISAs and investing

More terms