Choosing the right investment account: ISA or GIA?

ISA or GIA? Some tips and tricks to help you decide where to keep your investments.
Choosing the right investment account: ISA or GIA?
Updated
April 5, 2022

Table of contents

We invest to try and do more with our money. 

And while it might not seem like a biggy, the account you choose to keep your investments in can make a big difference to your goal. 

To help you decide which investment account is right for you, we’re going to look into two of the main ones: the general investment account and the stocks and shares ISA

Before we start, it’s important to understand that the value of your investments can fall as well as rise, so you might get back less than you originally invested. You also need to be aware that pension and tax rules can and do change. Any tax treatment depends on your individual circumstances.

What is a GIA? 

A GIA or general investment account does what it says on the tin. It’s an everyday account for you to hold your investments in. 

GIA’s are quite flexible when it comes to which investments you can hold. You should be able to invest in most things from stocks to ETFs, investment trusts and beyond.

The main thing to know about GIAs is that they don’t protect your investments from the big UK investment taxes: 

  • Capital gains tax (a tax on any profits you make when you sell your investments and a few other assets).  
  • Dividend tax (a tax on UK dividends). 
  • Tax on savings (a tax on any savings interest you’re paid).  

Now, you might not face taxes straight away, there are certain amounts we can earn each year without needing to pay tax (take a look at the table below) but it’s definitely something to keep in mind when choosing an investment account. 

If your investments do well you could face an unwelcome tax bill.

UK investment taxes to know about 

UK investment taxes
What's taxed? The scenario Basic rate tax payer Higher rate tax payer Additional rate taxpayer
Capital gains tax

Your gains.

You make a profit on the sale of your investments in a year, that's above the £12,300 tax-free allowance.

Profits from the sale of other assets e.g. a second home can also use up your CGT allowance.

10%

20%

20%

Dividend tax

Your dividends.

You're paid over £2,000 in dividends in a year.

7.5%

32.5%

38.1%

Interest income

Interest from cash savings, corporate bonds and other fixed interest products.

You earn interest on your cash savings or you're paid income from bond investments.

20% (interest over £1,000)

40% (interest over £500)

45%

Disclaimer: This table assumes you have used your £12,570 personal allowance. Comparisons are based on our understanding of the gov.uk information as at 6 Jan 2022. For confirmation of up to date information, you should visit GOV.UK. Please note that tax treatment depends on the individual circumstances of each client and may be subject to future change. 

What is a stocks and shares ISA? 

A stocks and shares ISA (also known as an investment ISA) is a tax-efficient investment account. 

This means that, unlike a GIA, any money you earn from your investments will be free from UK taxes. 

Inside an ISA, you won’t pay income tax on any UK dividends or interest and you won’t need to worry about capital gains tax if you sell your investments for a profit. 

However, given these juicy tax benefits, ISAs come with a few more strings attached. 

There’s a limit on how much money we can put into ISAs each year.   

Each tax year HMRC sets an ISA allowance and it’s the total amount of money you can put into ISAs that tax year. 

💡 A tax year runs from 6 April to 5 April the following year, so the current tax year 2022/2023 ends on 5th April 2023 at midnight. 

The ISA allowance for the 2022/23 tax year is £20,000. You can invest all £20,000 in a stocks and shares ISA or spread it across different ISA accounts, perhaps a cash ISA or Lifetime ISA.

ISA allowance

You can only open or add money to one stocks and shares ISA each year. 

This means you can’t go about opening or adding money to a handful of stocks and shares ISAs, you have to pick one ISA and one provider for that tax year. 

That’s not to say you can’t keep old stocks and shares ISAs, you just can’t add money to more than one. If you have old stocks and shares ISAs you could think about keeping them in one place by transferring your ISAs to the same provider. 

For the full ins and outs of stocks and shares ISAs check out our ISA guide

GIA vs ISA

Now we’re on the same page about the two investment accounts, let’s take a look at the pros and cons of each. 

GIA pros and cons 

Pros of a GIA Cons of a GIA

No annual limit, invest as much as you like.

You won’t be taxed on dividend income under £2,000.

You won’t need to pay any capital gains tax on any profits under £12,300 (but remember this allowance includes other assets).

You’ll pay tax on your investments when you go above the allowances.

GIA’s usually count as part of your estate when thinking about inheritance tax (IHT).


ISA pros and cons

Pros of an ISA Cons of an ISA

Protect any investment growth from UK taxes.

When you die, a spouse or civil partner can inherit your ISA and its tax-free status, giving a one-off boost to their ISA allowance.

ISA accounts can cost more than GIAs.

When you die, if your ISA is inherited by anyone other than a spouse or civil partner it will still form part of your estate and could be subject to inheritance tax (IHT).

Choosing the right account for you 

Ultimately which account is right for you, is up to you. It’s important to remember too that you can have both a GIA and an ISA.  

However, when it comes to comparing an ISA and a GIA, the main deal-breaker is tax. 

Inside an ISA your investments are protected from key UK investment taxes but with a GIA they are not. 

Comparing ISAs and GIAs


How much tax could you save with an ISA? 

Capital gains tax example 

Let’s say you bought shares for £5,000 and have just sold them for £25,000, making a £20,000 profit. 

However, after taking into account your £12,300 capital gains tax-free allowance, the profit on which you could be taxed drops to £7,700. 

Tax owed with ISA 

If these shares were held in an ISA, you wouldn’t owe any tax. 

Taxed owed with GIA

With a GIA, you’d likely have some tax to pay on your £7,700 profit. How much tax depends on whether you are a basic, higher or additional rate taxpayer. 

  • Basic rate taxpayers pay CGT tax at 10% so you would owe £770
  • Higher rate and additional rate taxpayers pay CGT tax at 20% so you would owe £1,540

Dividend tax example 

You’ve got a full-time job and earn £30,000 a year and in the same year, you’re paid £5,000 in dividends from your investments. 

Because of your salary, you’ve already used your personal allowance (the first £12,570 in income that no one pays income tax on). 

So after taking into account your £2,000 dividend allowance, the dividend income you could be taxed on drops to £3,000.

Tax owed with ISA 

If these investments were held in an ISA, you wouldn’t owe any tax. 

Taxed owed with GIA

With a GIA, you’d likely have some tax to pay on your dividend income after using up the allowance. 

How much tax depends on whether you are a basic, higher or additional rate taxpayer. 

  • Basic rate taxpayers pay 7.5% tax on dividends, so you would owe £225
  • Higher rate taxpayers pay 32.5% tax on dividends, so you would owe £975
  • Additional rate taxpayers pay 38.1% tax on dividends, so you would owe £1,143

💡From April 2022 (ie. the upcoming tax year) the government plans to increase each dividend income tax rate by 1.25%.

 

Does an ISA protect you from all taxes?  

While an ISA protects you from the main investment taxes in the UK there are a few charges it can’t protect you from.  

Stamp duty (SDRT)

This is a 0.5% charge, paid and deducted at the time you buy a UK stock, with the exception of AIM stocks and some ETFs. You do not pay stamp duty on US stocks.

Withholding tax on US dividends

The US Government charges non-US residents a 30% tax on any income received from US investments. Thanks to an agreement between the UK and the US, UK residents can generally reduce this tax to 15%.

To do this you’ll need to fill in a W-8BEN form, which declares you’re not a US tax resident. If you’re a Freetrade customer we’ll prompt you to fill it in in-app.

Final thoughts

That’s probably enough tax chat for now. 

Hopefully, it’s clear that an ISA could save you both from taxes and the hassle of calculating them. 

Check out our guide for more information on how your investments are taxed

Learn about opening an ISA with Freetrade or transferring your ISA to Freetrade.

More on ISAs


Important information on SIPPs

SIPPs are a pension product designed for people who want to make their own investment decisions. You can normally only access the money from age 55 (set to rise to 57 from 6 April 2028).

This article is based on current rules, which can change, and tax relief depends on your personal circumstances. When you invest, your capital is at risk.

The value of your portfolio can go down as well as up and you may get back less than you invest.

Before transferring a pension you should ensure you will not lose valuable guarantees or incur excessive transfer penalties. Pensions are usually transferred as cash so you will be out of the market for a period.

Freetrade does not currently offer drawdown products for our SIPP.

Important information

This should not be read as personal investment advice and individual investors should make their own decisions or seek independent advice.

When you invest, your capital is at risk. The value of your portfolio, and any income you receive, can go down as well as up and you may get back less than you invest. Past performance is not a reliable indicator of future results.

Eligibility to invest into an ISA and the value of tax savings both depend on personal circumstances and all tax rules may change.

Freetrade is a trading name of Freetrade Limited, which is a member firm of the London Stock Exchange and is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales (no. 09797821).

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