A Stocks and Shares ISA allows you to legally shield your investments from the taxman. But how does it work? And how can you open an account? Here’s the lowdown.
What is a Stocks and Shares ISA?
Opening a Stocks and Shares ISA allows you to access your investing profits tax free, up to an annual allowance. This allowance is £20,000 for the 2021/22 tax year. The allowance refreshes each year, so if you don’t use it, you can’t carry it forward.
Anything invested in an ISA stays tax free in subsequent tax years, which is a real boon if you manage to build up an extensive portfolio.
Aside from the big tax advantage, a Stocks and Shares ISA isn’t any different from a normal investing account. So if you are looking to invest, it’s almost always a good idea to invest within the tax-free wrapper offered by a Stocks and Shares ISA.
How does a Stocks and Shares ISA differ from a Cash ISA?
While a Stocks and Shares ISA allows you to invest tax free, a Cash ISA allows you to save tax free. That’s because a Cash ISA is simply a tax free savings account.
It is worth bearing in mind, however, that your annual tax-free allowance applies to any kind of ISA. So if you deposit £5,000 into a Cash ISA account, you can then only deposit a maximum of £15,000 into a Stocks and Shares ISA during the same tax year.
What can I invest in?
You can invest in pretty much anything with a Stocks and Shares ISA, including land, property, or even bottles of wine. However, most people stick with shares, bonds or funds.
A share is a part of an individual company, a bond is a loan to the government or a company and a fund is a mix of both.
Some Stocks and Shares ISAs give the option of investing in themed portfolios too. For example, some ready-made portfolios may focus on one specific geographic region, while others may focus on a particular industry or even green initiatives.
How can I open an account?
To open a Stocks and Shares ISA, you’ll most likely have to choose a provider and then funds to invest in. Some providers, such as Hargreaves Lansdown, offer both in one place.
You’ll also need to decide whether you want to actively or passively invest. Active investing refers to picking and choosing investments yourself (or paying someone to do it for you). Meanwhile, passive investing involves investing in a ready-made portfolio. See our article on passive vs active investing for more information on these investing types.
If you are looking to passively invest, it’s worth knowing that you don’t have to go through a traditional platform. Robo-advisors use algorithms to choose investments for you based on your answers to risk-based questions. To learn whether robo-advisors are a good option, take a look at our article on whether robo-investing is good.
What fees will I have to pay?
If you invest in a Stocks or Shares ISA, you’ll have to pay fees, just as you do when investing outside of a tax-free wrapper. These fees may include:
- Platform costs: The cost of using a platform that hosts your fund.
- Buying and holding costs: When you buy funds, you’ll usually have to pay a fee to buy and hold them.
- Fund manager charges: If you want someone to manage your investment, you’ll have to pay them a fee – usually a percentage of the amount you invest.
- Transfer-out fees: A Stocks and Shares ISA can be transferred to another provider or even converted to a cash ISA without losing its tax-free status. Yet if you do this, you may be hit with a fee.
What else should I know before investing?
Before investing, make sure you understand the risks involved, and recognise that the value of your investments can go down as well as up. Also understand that if you decide to invest your wealth, it might be better to take a long-term approach. That’s because it gives you more time to ride out any volatility, and minimises the chances of selling your investments following any sudden dips.
If you’re new to investing, take the time to get your head around the Investing Basics.
Please note that tax treatment depends on your individual circumstances and may be subject to change in the future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
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