Your guide to ISAs

Everything you need to know about our tax efficient account
Your guide to ISAs
September 10, 2020

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

Why is this so exciting?

Well, it means your stocks and shares ISA allowance will reset and you can invest once again with some sweet, sweet tax breaks.

What is a stocks and shares ISA?

In case you don't know ISAs — individual savings accounts — are unique to the UK and give holders a means of shielding money from the taxman.

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 can invest up to £20,000 a year and can benefit from any gains on this portfolio being largely free of tax.

‘Gains’ in this context means two things:

1) Any money you make from dividends
2) Any money you make from buying and selling stocks or ETFs at a profit

How does a stocks and shares ISA work?

Under the current rules, ISAs are not a one-time thing and your £20,000 allowance will reset at the end of every tax year.

That means, if you are fortunate enough to have £40,000 sitting around, you can put half of it into an ISA one year and the other half into the same account the next year.

A lot of people will tell you that ISAs are totally tax-free. This isn’t entirely true. If you buy non-UK stocks, you may be subject to local taxes, such as US withholding tax charged on dividend payments.

You should also bear in mind that tax treatment depends on your individual circumstances and the rules may be subject to future change.

Lastly, remember that you cannot transfer shares that you already hold into an ISA. You have to deposit cash into an ISA and then purchase shares. If you already have an ISA, however, you can transfer your ISA account to another ISA.

What’s so special about a Freetrade ISA?

We got into the brokerage business to make investing simple and affordable. That’s the approach we also took when building our ISA offering.

We don’t charge custodial fees and we don’t charge any trading commissions.

Instead, you pay a flat fee of £3/month.

Once you’ve set up your account, you’ll be free to trade, free in the knowledge that no trading commissions are going to be eating into your investments.

Do I need an ISA?

When people hear the words ‘tax-free’ they have a tendency to leap up and down with joy and blindly throw money at the person that uttered them.

ISAs are a bit like that. People can be dead sure that they need one when they might not.

The key thing to remember is that, without an ISA, the UK government already lets you keep up to £12,000 a year in capital gains and £2,000 from dividends income tax-free.

That being the case, if you have an investment portfolio that you think is unlikely to increase in value by more than £12,000 in the coming tax year, you may not need an ISA.

However, it is also worth bearing in mind that the ISA rules do not allow you to claim unused allowances from previous years, so you may want to put some money into an ISA now, so that you have a larger ISA pot in future years.

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.

This should not be read as personal investment advice and individual investors should make their own decisions or seek independent advice. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication.

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).