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Stocks And Shares ISAs

What is a stocks and shares ISA?

A stocks and shares ISA is a very popular financial product held by millions of people in the UK – it allows you to invest without suffering any income tax on your dividends or capital gains tax on your profits. 

While you may not worry that much about tax when you first start investing, it’s surprising how quickly your portfolio can build up over time. Before you know it, you could be liable to pay hundreds or even thousands of pounds in tax each year, should you decide to hold your investments outside of an ISA.

You can put up to £20,000 into your stocks and shares ISA each tax year. Every UK resident aged 18 and over gets this same annual allowance, so a couple can invest up to £40,000 each tax year. Note that tax years run from 6 April to 5 April in the UK — ISA limits are not based on calendar years.

The £20,000 annual limit applies to all your ISA accounts, so you can’t put £15,000 into a stocks and shares ISA and £15,000 into a cash ISA in the same tax year as that would breach your annual subscription limit. 

What is a stocks and shares ISA good for?        

A stocks and shares ISA usually works best if you plan to invest regularly over many years, as this means you are more likely to build up a significant portfolio and therefore be more likely to have to pay tax on your dividends or any profits you make.

Investing should be thought of as a long-term endeavour so if you think you may need the money you are putting into a stocks and shares ISA within the next five years, as a very rough guideline, then it may be less appropriate.

Some brokers make a small additional charge for having a stocks and shares ISA as opposed to a taxable trading account although, over time, any charge should be more than outweighed by any tax savings you make. 

What investments can be held in stocks and shares ISAs?        

Stocks and shares ISAs can hold a wide variety of different investments. There are four main types:

  • shares in individual companies listed on what are called recognisable exchanges (most major markets such as London and New York fall into this category and brokers tend to be good at flagging up whether a particular share is eligible for a stocks and shares ISA).
  • unit trusts, exchange traded funds (ETFs), and investment companies are all pooled investment vehicles, which typically own anywhere from a dozen to a few thousand separate companies
  • corporate bonds, which are loans to a company, usually lasting for several years
  • government bonds, which are loans to a government, typically over a few years to a few decades

How stocks and shares ISAs work        

An important thing to understand is that you can only put cash into a stocks and shares ISA (although you can also sometimes put in shares you own via an employee share scheme).

Once the cash is inside your ISA, you can then use it to buy individual shares, funds, and so on.

Any stocks and shares ISA dividends you receive or profits that you make by selling an investment stay within the ISA until you decide to take them out. As soon as you take money out of a stocks and shares ISA it becomes taxable once more.

You can only put up to £20,000 into your stocks and shares ISA each tax year. This works on a net basis so you could, for example, put in £18,000 at the start of a tax year, withdraw £8,000 later on in a tax year, and then put in up to £10,000 at the end of a tax year.

The annual subscription limit has risen significantly since ISAs were introduced in 1999. Initially, it was £7,000 and it has been increased a number of times since, although it has remained at £20,000 for the last few years. 

Once a tax year ends and a new one begins, you get a new annual subscription limit. Any unused allowance from the previous tax year is gone forever. 

Most brokers won’t let you put in more than £20,000 in a single tax year into the same ISA account but if you have ISAs with different providers, or a Cash ISA as well, then it’s important to keep track of how much you put in to your various ISA accounts to make sure you don’t exceed the £20,000 annual subscription limit. 

If you put money into a stocks and shares ISA over many years with the same ISA provider then they will usually combine all your investments in a single ISA account, which makes it a lot easier to manage your money, dividends, etc.

How to buy a stocks and shares ISA      

Stocks and shares ISAs are offered by most brokers and investing platforms, so pretty much any company that allows you to buy and sell shares will also offer an ISA as part of this service.

You usually pay exactly the same to buy, sell, and hold investments within an ISA as you do in a taxable trading account. However, some companies may make a small administration charge each month, quarter, or year for an ISA account, so this is something to compare when choosing which provider might suit you best.

Tax and stocks & shares ISAs        

While you keep your investments within your stocks and share ISA, they are exempt from income and capital gains tax. 

So you do not have to pay any income tax on any stocks and shares ISA dividends that you receive, nor do you have to pay any capital gains tax on any profits you make when you sell.

There is one tax you do have to pay and that’s stamp duty. This is charged at 0.5% of your purchase cost when you buy any UK-listed shares or investment companies.

You can also pass on your ISA to your spouse or civil partner when you die so any ISAs you hold can be transferred into their ISA so that the investments can continue to be sheltered from income and capital gains tax. 

What is a stocks and shares ISA repair?

Sometimes an ISA can become invalid, maybe because it holds a non-qualifying investment or you have put more than the annual subscription limit into your ISAs in a single tax year. 

If this happens, HMRC and your ISA provider will work together to repair your ISA and fix the problem. It’s usually best to contact your ISA provider if this happens rather than attempting to fix the problem yourself.

If things go wrong with your stocks and shares ISA

Stocks and shares ISAs are protected by the Financial Services Compensation Scheme (FSCS) so you are protected to the value of £85,000 should your provider fail as a business. Note that this does not protect you from simply losing money on an investment because its price has gone down since you bought it.

If you’re not happy with the service that your ISA provider is giving you or you find a cheaper provider, then you can transfer your ISA to another company. Note that you shouldn’t simply withdraw the money as this will mean it loses the tax protection that an ISA provides.

If you are no longer a UK resident, you can no longer put money into your ISA in the year that you leave the country. However, you can continue to hold that ISA and receive protection from tax. You can put money into it once you become a UK resident again.


 

FAQ

Can I reinvest dividends in an ISA?

Yes, stocks and shares ISA dividends stay within your ISA unless you choose to withdraw them. Many brokers offer schemes that allow you to reinvest your dividends automatically at a low cost or you can decide yourself exactly where you want to reinvest your money.

Is it worth having a stocks and shares ISA?

Stocks and shares ISAs protect your investments from both income and capital gains tax and this can be a very valuable benefit, especially if you expect to invest on a regular basis for a number of years. There is sometimes an additional charge for having an ISA compared to a non-taxable account but this varies between providers and some make no extra charge.

What happens if I put more than 20000 in my ISA?

Most brokers will check how much you have put into your ISA each year to make sure that you don’t breach the £20,000 limit. But if you have ISA accounts with multiple providers, it’s possible to breach the limit by accident. If this happens, HMRC will reclaim the money from the account that went over the £20,000 limit and repair the ISA. You may need to pay some tax as a result of this process. If you spot that you have made a mistake with your ISA in this way then you can contact HMRC and your ISA providers to inform them so that they can begin the repair process.

What is the best performing stocks and shares ISA?

This will depend entirely on what you put into your stocks and shares ISA. Investing in funds or trackers will usually provide lower but more consistent returns than investing in individual shares.