In this guide we’ll cover everything you need to know about stocks and shares ISAs. Learn what an ISA actually is, how these tax-efficient investment accounts work, and what you should know about stocks and shares ISA rules and the annual ISA allowance.
Read on to see if ISAs are the right place for your savings.
Stocks and shares ISAs explained
Within a stocks and shares ISA you won’t pay:
- Income tax on dividends or interest
- Capital gains tax if you sell your investments for a profit
With a stocks and shares ISA you can invest in a range of shares, exchange-traded funds, investment trusts and more.
Before diving in, it’s important to understand that any tax treatment depends on your individual circumstances and may be subject to change in future. You also need to be comfortable with the fact that the value of your investments can fall as well as rise, so you might get back less than you originally invested.
How does a stocks and shares ISA work?
Who can open a stocks and shares ISA?
To open a stocks and shares ISA you must be:
- Aged 18 or over
- A UK resident for tax purposes
- Comfortable that the value of investments can go up as well as down
- Prepared to invest for at least 5 years
2021/2022 ISA allowance
Each tax year HMRC sets an ISA allowance. It’s the total amount of money you can put into ISAs each year.
The ISA allowance for the 2021/22 tax year (which ends on 5th April 2022) is £20,000.
You can invest all £20,000 in a stocks and shares ISA or spread it across different ISA accounts.
What is the deadline for opening an ISA?
The ISA deadline for this tax year is midnight on the 5th April 2022. To take full advantage of your ISA allowance you will need to have added money to your stocks and shares ISA by then.
After the deadline, a new tax year has started so you will have a new allowance to make use of. You can’t carry forward your allowance, so you will lose it if you don’t use it by 5 April.
What can you put in a stocks and shares ISA?
Stocks and shares ISAs aren’t too fussy about what goes in them. That means they’re a good way to spread your investments across different things.
Some of the things you can hold in a stocks and shares ISA:
- Exchange-traded funds (ETFs)
- Investment trusts
- US real estate investment trusts (REITs)
- Special purpose acquisition vehicles (SPACs)
What about cash?
We think about cash in a stocks and shares ISA as on its way to somewhere else.
That could be on its way to being invested or withdrawn to your bank account.
So while you can hold cash in your stocks and shares ISA it’s important to point out that if you intend to use your ISA just to hold cash as savings, you might find a cash ISA more suitable.
We’ve written in more detail about keeping cash in your investment account and we’ve also done something to help. Freetrade Plus members can earn 3% interest on cash, up to a max deposit of £4,000. Learn more here.
Ready to invest?
If you’d like to brush up on some of investing basics before getting started, take a look at our guides:
- What makes a good investor
- How to invest in stocks and shares
- What are ETFs and how to invest in them
It’s important to understand that the value of investments can fall as well as rise and you may not get back what you originally invested.
What are the advantages of a stocks and shares ISA?
Stocks and shares ISAs have two key benefits:
- By investing, you have the opportunity to grow your savings
- You can protect any investment growth from UK taxes
1. Opportunity to grow your savings
Keeping your savings as cash
Cash savings are one way to save but when it comes to growing your savings, cash savings, whether that be in a bank, savings account or a cash ISA, might not be the best product to focus on.
Unless the interest you receive on your savings is higher than the rate of inflation, left as cash, your money is likely to be worth less in the future.
UK interest rates have been low and even near zero for a while now, so it’s worth double-checking what rate you are getting on your savings. Does it cover inflation?
Here’s an example of how inflation can hurt your spending power over the long run.
The longer you leave it, the less your £2,000 is worth.
Disclaimer: This table is just for illustrative purposes only and does not use real inflation rates.
Investing your savings
As cash, your money is not going to experience the short term ups and downs of the stock market. £2,000 today is likely to be worth a similar amount in a year.
With investing, however, you are buying things that can go up and down in value and could lose their value altogether.
In exchange for taking on this risk and the potential ups and downs of the stock market, investors have historically been rewarded with a higher rate of return on their cash and an opportunity to grow their savings.
Stocks and shares ISA returns example
Let’s say you invested £2,000 in the global stock market 10 years ago, your £2,000 would now be worth just under £5,000. If you’d invested 20 years ago, that would be closer to £6,000.
These may be attractive numbers but it’s important to recognise they are based on past performance and are not a reliable indicator of future results.
You’ll also see from the chart that the growth didn’t happen overnight, there were ups and downs along the way.
When you’re investing, the longer you can leave your investments, the better. A good rule of thumb is to be prepared to keep your money invested for at least five years.
2. Tax benefits of a stocks and shares ISA
In a stocks and shares ISA, any money you earn from your investments will be free from UK taxes. That means:
- No capital gains tax if you sell your investments for a profit
- No income tax on dividends or interest
Disclaimer: This table assumes you have used your personal allowance. Comparisons are based on our understanding of the gov.uk information as at 4 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.
Stocks and shares ISA taxes
There are a few taxes stocks and shares ISAs won’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.
What are the risks of a stocks and shares ISA?
ISAs themselves don’t necessarily carry risk - they are just the accounts. It’s the investments you put in your ISA that carry the risk.
The risk (known as investment risk) is the risk that your investments could end up being worth less than they were when you started.
The good news is there are lots of things you can do to reduce investment risk. Take a look at our guide on investment risk and how to combat it.
Your ISA provider goes out of business
This risk is to do with the investment platform or provider going out of business rather than your investments losing value themselves.
The Financial Services Compensation Scheme (FSCS) exists to protect customers of financial services firms, such as banks, insurers or investment firms if the firm goes out of business.
If the provider in question has protection, the scheme will cover and pay back your funds up to £85,000.
How to build a high-performing stocks and shares ISA
Unfortunately, there is no one answer to a high-performing portfolio. It all comes back to what you are trying to do.
- Are you just looking for growth or would you like an income from your investments?
- Do you want to stay invested for 10 years or 20 years?
- How do you feel about risk?
And while we can’t give you an exact recipe for your portfolio investment performance, we can suggest a few core ingredients:
🌍 Think global
Spread your investments across different countries, sectors and companies. This way your portfolio isn’t reliant on one thing to make it grow and if one area is not performing so well, other investments could help to offset this.
For more info, take a look at our guide on how to diversify your portfolio.
🗓 Invest regularly
Stock markets are meant to move up and down as they take in more information.
Rather than waiting for the right moment to invest, investing regularly means you won’t miss out on the most important growth ingredient - time.
It also means you can worry less about the price you pay, as you’ll likely pay slightly higher and lower prices over time.
⏳ Stay invested
This is the one to remember. By staying invested you give your investments the best chance to grow and you can worry less about any short term market movements. You’re also less likely to miss out on any growth periods due to mistimed decisions.
How long should you stay invested? That’s up to you. But you shouldn’t really be investing if you need your money back in the next five years.
With investing, the longer you can stay invested, the better.
💡 Learn more:
Choosing the best stocks and shares ISA provider for your needs
The best stocks and shares ISA will be the one that suits your needs the best.
We all have different investing goals but we also have different expectations and requirements for what we want from our ISA provider.
Here are a few things to keep in mind when comparing stocks and shares ISAs:
- How much does the platform charge to hold your investments?
- How much does it cost to place a trade?
- Does it have what you want to invest in?
- How user-friendly is the platform?
- Do they keep you up to date on the investment world and tips for investing?
How much does a stocks and shares ISA cost?
Different platforms charge customers in different ways. When looking at which platform to invest with, the charges to look out for are:
- Platform charges
- Trading commission
- Foreign exchange fees
- Ongoing charges for products like ETFs, investment trusts and funds
- Exit charges
Charges can have a real impact on your investments especially if investment performance is not doing enough to offset them, so it’s important to check if your ISA is good value.
Our investment fees calculator compares charges across different platforms and could help you work this out.
💡 Find out more about Freetrade’s stocks and shares ISA charges
Opening a Stocks and Shares ISA
Opening a stocks and shares ISA is easy.
As long as you don’t already have a stocks and shares ISA for the current tax year, you’re 18 or over and a UK resident for tax purposes, you are ready to go.
Find out more about opening a stocks and shares ISA with Freetrade.
Transferring your stocks and shares ISA to a different provider
There are many reasons why you might consider transferring your ISA.
You could have built up a few ISAs over the years with different providers or perhaps your needs have changed and you’ve found a provider that suits you better.
One of the main reasons we hear about is that it’s easier to keep track of how investments are performing if everything is in one place.
It’s also easier to keep track of how much you are being charged. If you have different ISAs with a few providers, you’re likely to be paying different charges for all of them.
Whatever your reason, it’s important to make sure an ISA transfer is right for you before you make the move. Our guide to ISA transfers should help here.
💡 Find out more about transferring ISAs to Freetrade
How is a stocks and shares ISA different from other ISA accounts?
Stocks and shares ISAs stand out from other accounts for a few reasons:
- You can spread your money across a range of investments
- You can use the whole ISA allowance
- You can withdraw your investments at any time but if you do, you will lose your tax-free allowance
- Any investment growth is tax-free
To help you decide which ISA account is right for you, here’s a summary of the different types.
Disclaimer: Comparisons to ISA accounts are based on our understanding of the gov.uk/individual information as at 25 August 2021. They are shown for illustrative purposes only. For confirmation of up to date features, you should visit the website.
Stocks and shares ISA rules
Who can open a stocks and shares ISA?
You must be 18 or over and a UK resident or a Crown servant (e.g. foreign diplomat or civil service) if you do not live in the UK.
How much can you invest in a stocks and shares ISA?
For the tax year 2021/2022 you can put up to £20,000 in a stocks and shares ISA.
What can you put in a stocks and shares ISA?
You can invest in a whole range of investments.
When can you get your money back?
There is no fixed time limit on how long you need to hold a stocks and shares ISA. That said, when you invest you should be ready to leave your money alone for at least five years.
If you need to take money out of your stocks and shares ISA, you can do so at any point. If you do take any money out it’s important to remember you will lose your tax-free allowance.
Here’s an example of what we mean by losing your tax-free allowance. Let’s say you’ve added £16,000 to your ISA this tax year and you withdraw £2,000. While the amount left in your ISA is now £14,000, the remaining amount you can put into your ISA this year is still £4,000. That’s because for most ISAs once you’ve used your ISA allowance once it’s gone.
Stocks and shares ISA FAQs
What happens to an ISA when you die?
If you die your ISA and its tax benefits will end. This doesn’t happen immediately but when your executor closes your ISA or the administration of your estate is completed. If neither happens your provider will close it 3 years and 1 day after your death.
Your ISA provider can be instructed to sell the investments in your ISA or transfer them to your surviving spouse or civil partner if they are with the same ISA provider as you.
There won’t be any income tax or capital gains tax to pay up to this date, but your ISA investments will form part of your estate for inheritance tax purposes. You can leave your ISA for anyone you wish to in your will. Your spouse or civil partner can also inherit your ISA’s tax-free status as a one-off boost.
For example, if you have an ISA worth £40,000. When you die, your spouse or civil partner will get an additional one-off ISA allowance of £40,000 as well as the standard ISA allowance (which is £20,000 this year).
What happens to an ISA when you move abroad?
When you move abroad and are no longer a UK resident you’re not allowed to keep putting money in your ISA. This doesn’t happen straight away but starts when the next tax year kicks in.
Say you left the UK in December when the new tax year starts on 6th April the following year, you wouldn’t be able to add any money to your ISA.
You must let us know as soon as you stop being a UK resident. Head to contact us.
Can I transfer my ISA to another person?
You are not allowed to transfer your ISA to another person.
Can I have more than one stocks and shares ISA?
You can only open or add money to one stocks and shares ISA each tax year. However, you may have old stocks and shares ISAs you’ve opened with other providers in previous tax years and these are fine to hold on to.
It’s worth noting that you could combine old ISAs by transferring them all to one provider. Before doing so it’s important to check if you’ll be charged any exit fees for leaving your current provider and whether your current provider allows transfers in.
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. But if you do take any money out of your ISA it’s important to remember you will lose your tax-free allowance.
Here’s an example of what we mean by losing your tax-free allowance.
Let’s say you’ve added £16,000 to your ISA this tax year and you withdraw £2,000. While the amount left in your ISA is now £14,000, the remaining amount you can put into your ISA this year is still £4,000. That’s because for most ISAs once you’ve used your ISA allowance once it’s gone.
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. 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 at a time rather than small ones regularly.
But on investment platforms with low trading fees, this doesn’t exist. You can invest what you can afford and as regularly as you like, rather than saving up to then invest.
It’s always a good idea to calculate annual ISA fees to make sure your costs are under control.
Past performance is not a reliable indicator of future returns.
Source: Bloomberg, as at 31 August 2021. Basis: bid-bid in local currency terms with income reinvested.
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 in an ISA and the value of tax savings depends on personal circumstances and all tax rules may change.
Before transferring an ISA you should ensure you will not lose valuable guarantees or incur excessive transfer penalties. ISAs are usually transferred as cash so you will be out of the market for a period.
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).