Your guide to ISAs

Everything you need to know about stocks and shares ISAs
Your guide to ISAs
Updated
June 22, 2021

Table of contents

The beginning of April in the UK brings with it an exciting event. That is, of course, the end of the tax year.

Why is this so exciting?
You’ll get a brand new ISA allowance when the new tax year kicks in, helping you invest tax-efficiently, hopefully on the way to becoming an ISA millionaire.


What is a stocks and shares ISA?

Individual savings accounts (ISAs) are unique to the UK and give UK residents a means of saving and investing tax-efficiently.
There are a few different types of ISA out there but Freetrade offers a stocks and shares ISA, which makes sense because stocks and shares are our bag.
With a stocks and shares ISA (you might hear it called an investment ISA too), you can invest up to £20,000 a year and won't have to pay capital gains tax (CGT) on any gains your investments make inside the ISA account.


When is a stocks and shares ISA a good idea?

The tax efficiency that comes with an ISA is not to be sniffed at. While those investing outside of an ISA do still have a capital gains tax allowance of £12,300 to use before they have to pay tax on their gains, investing is a marathon, not a sprint.

Compounding growth over years should be at the heart of all long-term investing. If you're constantly keeping an eye on short-term gains (and possibly chopping them so you don't go over your CGT allowance) you run the risk of stunting that growth. 
Not to mention how time-consuming that would be and probably pointless as there’s a £20,000 ISA allowance on hand that you could use instead.

Where an ISA can be particularly useful is if you invest in a company that goes on to grow well over the years. 
In an ISA, those long-term gains aren’t liable for capital gains tax when you eventually sell. If you had invested in the same companies and achieved the same growth in a general investment account, you might have to pay tax when you cash out.
Considering an ISA is one way to controlling how much you pay tax on investments in the UK.


Do you need to be an experienced investor to have a stocks and shares ISA?

The great thing about ISAs is that you don’t have to be a die-hard investor to use them. Whether you’ve been investing for years or this new tax year is the first time you’re considering investing, an ISA could be for you.
If you are wondering how to invest in stocks and shares, it’s worth doing some research before you begin. It might be useful to have a think about what makes a good investor too.

How does a stocks and shares ISA work?

Think of a stocks and shares ISA like a sweet wrapper. It houses whatever delicious morsel is inside but, ultimately, it’s the sweet that counts. This is why you’ll sometimes hear a stocks and shares ISA referred to as a ‘tax wrapper’ that you can use to select your own investments and hang onto any gains without fear of capital gains tax liabilities.
You have a £20,000 allowance and can invest in a wide range of products like company shares, exchange-traded funds (ETFs) and investment trusts
Unlike a pension, where you have to wait until at least the page of 55 to withdraw your money, ISAs are accessible at any point. Good investing is about long-term thinking and this can mean ISAs can help with big savings goals you might want to achieve before retirement, like a house deposit.

Who is eligible for an investment ISA?

To be able to open an ISA you must be:

  • 16 or over for a cash ISA
  • 18 or over for a stocks and shares ISA
  • 18 or over but under 40 for a Lifetime ISA

You also have to be either a UK resident or a Crown servant (employed in overseas civil service, for example) or their spouse/civil partner if you don’t live in the UK.
If you’ve already opened a stocks and shares ISA in the current tax year, you won’t be eligible for a new account until the new tax year kicks in. And you can’t open a stocks and shares ISA for someone else.

Is there a minimum amount to start with?

You don’t need thousands of pounds to open an ISA account. If you want to open a stocks and shares ISA with Freetrade, you can start with £2.

How many ISAs can you have?

If you have a long-term financial goal in mind, it might be that you build up a number of ISAs over the years. These might be a mixture of cash and stocks and shares ISAs, and might be with a number of different providers.
So, in this way, you can absolutely hold more than one ISA at once.
However, each tax year you can only open or contribute to one of each type of ISA account. Your yearly allowance will be split across all of them.

Do you have to invest straight away once the ISA is opened?

The reason there are different types of ISAs is so that you have specific accounts to match what you want to do with your money. Stocks and shares ISAs allow you to invest tax efficiently but there may be times you hold cash in there, between investments or just after you have put money in and haven’t invested yet.
That’s fine but be careful you don’t leave cash sitting there idle. Cash drag is a real thing and can hinder your investment performance if you let inflation erode your purchasing power.
A surprising amount of people forget that the ISA is just the account and they need to actually invest their cash once they add it. So, remember the wrapper analogy and get choosing what sweets you want inside.

How often should you invest?

Regular investing, as opposed to waiting for the ‘right time’ to jump into the stock market, can be very beneficial.
After all, when is the right time? 
Often investors spend so much time waiting for the right opportunity to come along that they are left stranded on the side lines.
Think about how valuable it is to be in the market instead, building up dividends over time, rather than planning the perfect entry point.
When you invest in regular intervals you’ll catch both the highs and lows of the market. That tends to average out over time and, critically, makes sure your cash is put to work.
Most people find monthly investing to be helpful, in line with their pay schedule.

Is there an incentive to invest bulk lump sums e.g. £5,000?

Sometimes, where high fixed trading fees are involved, it can make sense to invest large sums as opposed to small amounts, so you reduce the percentage you’ll have to make to cover your initial trading expenses.
But that can price out investors aiming to invest smaller, more regular sums. Luckily, on investment platforms with low trading fees, you can invest what you can afford, and regularly, rather than saving up to then invest.
In any case, it’s always a good idea to calculate annual ISA fees to make sure your costs are under control.

Can you withdraw money out of stocks and shares ISA?

This is maybe one of the biggest misunderstandings around ISAs. They are readily accessible and, unlike a pension, you can take your money out whenever you like. That said, remember good investing starts with a long-term horizon and if you aren’t happy to invest for at least five years, you might not be ready. 

Fees and interest penalties

Certain types of ISAs like Lifetime ISAs can carry penalties if you choose to take money out early but stocks and shares ISAs tend to be less complicated on that front.
In terms of fees, keep an eye on investment platform charges, costs related to each trade you place and ongoing charges for products like ETFs and investment trusts.
They can rack up over time, especially if they aren’t delivering the performance to justify their fees.
Also check what your provider’s terms are if you want to close your account or at least withdraw the money if you have reached your savings goal. The last thing you need is to be charged on the way out.

Long-term and short-term investing

The main reason it’s good practice to have the long term in mind when you invest is because of the volatility the stock market brings. It’s not something to be afraid of but stock markets and individual company shares will naturally have their ups and downs over the years. 
If you take a step back and look at the full history of global markets you’ll see a gradual increase towards the top right of the page. When you zoom further in it looks a bit choppier.
If your investment goals are too short-sighted, it might be that you end up needing the money at a time when your shares, or the market in general, has dropped. Short-term investing also prevents the snowball effect of compounding taking hold. 
The longer you give interest and dividend income to build and grow, the higher the likelihood you’ll start to benefit from real growth.

What are the tax benefits of a stocks and shares ISA?

The headline advantage of investing in a stocks and shares ISA is the tax efficiency. New investors or those investing small amounts might think they’ll never come close to amassing gains above the £12,3000 CGT limit but the longer you invest for, the more possible that can seem.
Setting your investments up for the long haul also means having an eye on how much of those gains you’ll be able to keep in the end. Investors already have platform fees to factor in, and having to hand over part of your gains to the tax authorities when you finally sell could be another big dent in your overall sum. 
ISAs provide a way to make sure you get to keep as much of your gains as possible.


2021/22 annual ISA allowance

You can invest up to £20,000 in a stocks and shares ISA in the 2021/22 tax year.

What is the deadline for opening your ISA?

To be able to take full advantage of your ISA allowance this tax year you’ll have to make sure your money is in there by 5 April 2021. After that date we will be in a new tax year so you will have a new allowance of £20,000 to make use of.


Are stocks and shares ISAs safe?

FSCS protection

The Financial Services Compensation Scheme (FSCS) may apply if you lose money as the result of your ISA provider going bust. 
You can check the details of the scheme here but it’s important to differentiate between the ISA provider and the investments you put in the ISA.
For example, if you've got a stocks & shares ISA with a bank, and the bank goes bust, you may be eligible for the scheme. It will not apply if you see a drop in the value of an investment you hold inside that ISA.

Risk and return

ISAs themselves don’t necessarily carry risk - they are just the accounts. It’s the investments you put in there that you’ll have to match to your own tolerance for risk.
Holding a diversified portfolio with company shares in different sectors and geographies, as well as other assets like bonds, property and infrastructure can help spread risk widely.
Holding a range of investments like this can help your assets pass the baton between themselves and pick up the slack if one of the team mates is lagging. This is the essence of portfolio diversification.

Learn more: Investment risk - all you need to know

How to choose the best ISA provider

We all have different financial goals but we’ll also have different expectations and requirements from the products and services we use to achieve them.
Some of the things to keep in mind when choosing an ISA provider, as well as choosing the best investment app, are: 

  1. How much it costs to place a trade.
  2. How much the platform will charge to hold your investments with them
  3. What sort of product range the provider offers. Are you more into investment trusts or individual company shares? Do they have what you want to invest in?
  4. How user-friendly the provider’s platform is. Do they have an app and is it easy to see where your money is at a glance?
  5. How their customer service works. Webchat, call centre, email support - which do you prefer and do they offer it?
  6. Does the provider have content to keep you up to date on the investment world and do they have a resource hub for investing in the stock market?


Type of investments that can be held in an ISA

Most shares of large global companies can be held in an ISA. There may be restrictions on companies listed on junior stock markets in foreign countries or on unrecognised stock exchanges. 
As always, it’s worth checking with your provider on their site or through their customer support if you are dealing with a small or niche company or sector.
You can also hold a range of bonds, ETFs, UK investment trusts and you can hold cash in a stocks and shares ISA too. It’s up to you how to pick those investments.

How do I build a high-performing ISA portfolio?

Before you start to think about investment performance it is crucial to factor in how any prospective investment suits your time horizon, tolerance for risk and ultimate investment goals.
Examining your attitude to these three factors might make you realise you need a longer time horizon to realistically achieve your goal, or need to change your expectations of risk.
In this sense, suitability is vastly more important than performance so make sure this is where you start. If you are unsure of how to choose suitable investments you might find it useful to talk to a financial adviser.

Stocks

When you’re selecting individual stocks for your ISA, remember to do research into a company’s fundamentals rather than rashly choosing something hogging the headlines.
Looking at how well a company is growing, how much debt it has on the balance sheet and how good company management is at using cash to promote further growth are all important.
Also have a think about whether the shares you are looking at match your goals. Are you purely looking for growth or would dividend-payers be handy to provide you with a level of income?

See all stocks and shares you can invest in on Freetrade

ETFs and investment trusts

The benefit of investing in ready-made portfolios is often that they are pre-prepared packages which allow you to access a certain investment theme, like green energy, or take advantage of an experienced trust manager at the helm.
There are some things to keep in mind though.
ETFs can range from cheap simple index-trackers to more costly actively managed strategies like Cathie Wood’s ARK funds, or novel approaches like the BUZZ ETF.
And while you might get diversification between individual companies, sometimes these can still all be in the same sector like technology, so if that sector falls, so might everything in that fund.
When it comes to investment trusts, it’s still wise to keep an eye on costs, especially if there is a performance fee attached to any index-beating performance.
Look at what the manager has selected for the trust, seek out videos on their process and do your best to get a feel for what they invest in and how they invest.

Commodities

Alternative assets like precious metals can be useful as another source of diversification in your ISA. Assets like gold, which can often move the opposite way to stocks, can be useful in times of volatility.
It’s important to get to grips with the role commodities can play in a well-diversified ISA portfolio. For more, read our guide to investing in commodities.

SPACs, Crypto, REITs

When it comes to even wider diversification from traditional assets, some investors have been casting the net towards assets like special purpose acquisition companies (SPACs), cryptocurrency firms and real estate investment trusts (REITs) in their ISAs.
It’s always worth learning more about their individual merits and, very importantly, how these assets could contribute to ISA portfolio diversification. It’s also worth keeping up to date with which ones are allowed to be held in an ISA. For example, some crypto miners can be held much more readily than the currency they mine.
Some will have restrictions on ISA eligibility because of their structure or where they are listed so check with your provider if you are interested in them.

What happens to any income from stocks and shares ISA?

One of the big reasons many people choose to invest through a stocks and shares ISA is that you get to keep the gains on your investments, including any income you receive. There is a difference in the way income is treated between UK and US stocks and shares though.
If you hold US-listed shares in an ISA, your provider should give you a W-8BEN tax form to sign so that you can benefit from the treaty tax rate. Completing this form reduces the tax rate from 30% to 15% and the dividend is paid into your account net of the withholding tax.


How to open a stocks and shares ISA

Providing you don’t already have a stocks and shares ISA for the current tax year, all you have to do is look around the marketplace and see which provider’s services suit you the best. Then it’s just a case of filling in a few forms or applying online.
Give yourself enough time to complete this as sometimes you’ll need to provide your ID and your National Insurance number before you will be able to start investing.


ISA Transfers

As we’ve said, you might find that you have racked up a number of ISAs over the years and you want to bring them all together. Or your needs might have changed and another provider would match them better. 
Whatever your reason, making sure an ISA transfer is right for you is important before you make the move. Here are a few things to consider beforehand.

Learn more: Guide to transferring your ISA to a different provider

What ISA account you can transfer

An ISA transfer is a way of moving your existing ISA to another provider or changing your existing ISA to another type with the same provider. For example, you could move a stocks and shares ISA from your bank to a stockbroker. The account type remains the same but the provider has changed.
Alternatively you could transfer from a cash ISA into a stocks and shares ISA. You could do this with the same provider or move to a different one.
An ISA transfer should be handled by the provider you’re moving to, so check with them to see how you can start the process.
The first thing to be aware of is a possible exit fee. This a fee you may have to pay for moving your ISA from one provider to another. It will be charged to you by your existing provider.
Make sure you know if you’ll have to pay one before you do anything.

Types of transfers

'In specie' transfers

This type of ISA transfer will keep your existing investment portfolio intact and move it to another company.
So if you were wondering, “Can I transfer shares into an ISA from another ISA?”, the answer is ‘yes’, if you do an ‘in specie’ transfer.
One key point to remember is that in specie transfers tend to take longer than cash transfers. 
In specie transfers can take around six to eight weeks, whereas cash transfers usually take about four weeks. You can check with either provider for more information on ISA transfer rules.

Cash transfers

This is where your existing holdings are sold and the resulting cash is transferred to an ISA with another provider. You might already be holding cash in a cash ISA.
Cash transfers are generally faster than in specie transfers.

How to transfer an ISA

Most of the technical side of an ISA transfer will be handled by the companies offering the accounts to you.
To complete an ISA transfer, you’ll need to:

  1. Identify another provider or account type to transfer to. 
  2. Calculate annual ISA fees you’ll be paying.
  3. Find out if you'll have to pay any exit fees to your current provider.
  4. If you do have to pay exit fees, check if your new provider will cover the cost of them.
  5. Open an account with the new provider.
  6. Fill out a transfer form for your new provider.


How to make an in specie ISA transfer

Not all ISA providers offer in specie ISA transfers, so if you want to perform one then you’ll have to be sure your provider offers them.
If they do then you’ll have to specify that you want this to be done. You can see a simple example of this on the Freetrade ‘transfer ISA account’ form.

How to make a cash transfer

Making a cash transfer is simple. When filling out your ISA transfer documents just specify that you want to make a cash transfer.

How long does an ISA transfer take?

How long your ISA transfer takes will depend on the method of transfer you choose.
A cash transfer usually takes four weeks. 
An in specie transfer usually takes six to eight weeks.
This will vary depending on the provider you use, so check with them to find out more about timings.

Can you transfer an ISA to another person?

No, you cannot transfer an ISA to another person.

Can you transfer an ISA into a SIPP?

No, you cannot directly transfer your stocks and shares ISA to a SIPP.
You could sell your ISA holdings and then buy them back in a SIPP, much like a bed and ISA though. 

We have some more content around ISAs that can help you decide if a stocks and shares ISA is the right thing for you:

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

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 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 depends 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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