What is an ISA?

ISA stands for Individual Savings Account

An investment account that allows you to invest in stocks & shares, investment trusts, funds and bonds without paying any income tax on the money you earn.

While there is no upper limit on the amount you can hold in your ISA, there is a limit on how much you put in each year. Each year you can invest up to £20,000 in an ISA; this is your annual tax-free ISA allowance. The tax year runs from 6 April until 5 April the following year. You can also save in a ‘cash ISA’. However, you must ensure that your combined contributions to both don’t exceed your annual limit of £20,000. If you maximise your annual ISA allowance each year, you could potentially build up a very healthy ISA balance – but bear in mind that with a stocks & shares ISA, there is always the risk that you may lose money on the investments you own.

Why put my money in an ISA?

The big advantage of a stocks & shares ISA is that you don’t pay any income tax on money you earn from it and you don’t have to declare your ISA savings on your tax return. Therefore investments that pay interest provide a 100% tax-free income when held within your ISA. Also, dividends received on shares within an ISA are tax free and don’t impact your annual dividend allowance.

On top of this, any profit you make when selling investments in your stocks & shares ISA is free of capital gains tax. Whereas, you would be liable to pay tax if you invested more than your annual tax-free allowance. Unfortunately, any losses made on your investments in your stocks & shares ISA cannot be used to offset capital gains on your other investments outside of an ISA.

The tax advantages of stocks and shares ISAs can be significant, particularly if you're a higher or additional-rate taxpayer.

Stocks & Shares or Cash ISA?

Stocks and shares ISAs give the possibility of higher returns than cash ISAs, but as with any investment in stocks & shares, you do undertake some risk as your investments may fall in value.

How much does a Stocks & Shares ISA cost?

Stocks & shares ISAs don't usually cost any more than general investment accounts. You'll pay two sets of charges: those set by the investment platforms or financial adviser and, if you're buying funds, those charged by individual fund managers. Being aware of the fees you pay is important because they apply if your investments perform well or badly and can significantly impact the total return on your portfolio. Not all investment platforms levy a percentage charge: some charge flat fees, fees for trading or a combination of all of these.

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