Stocks and Shares ISA text above Wall Street sign

A Stocks and Shares ISA is completely different from a Cash ISA. They come with higher risks and you need to know what you are doing. Those that do, however, join the thousands of others that are banking on much higher returns. The good news is that it’s now easier than ever to start investing. This comprehensive guide walks you through the basics so that you can get a piece of the action.

Want to know everything about ISAs and the other types available? Check out our Ultimate ISA Guide to Powerful Tax-free Savings.

What is a Stocks and Shares ISA?

There are now many different types of ISA and each are distinctly different.

An ISA is essentially a tax-wrapper. This means that any interest or earnings you make within that ISA are not subject to tax.

But what you do inside that ISA varies widely. Within a Stocks and Shares ISA, you are doing just that: investing.

Stocks and Shares ISA table in gree,n showing key things you need to know

Is a Stocks and Shares ISA a good thing?

Whether a Stocks and Shares is ISA is right for you is a personal decision. Ultimately, it comes down to your attitude towards risk and reward.

Due to the nature of investing, you should look at this as a minimum five-year time-frame. This should be long enough to ride out some of the inevitable bumps along the way.

Here are four top questions to ask yourself. If you can’t put four ticks in the boxes, then maybe it’s not for you. Which is totally fine, just look at a different type of ISA.

Blackboard showing whether a Stocks and Shares ISA is right for you

What can I invest in?

The world is your oyster and there is so much to choose from.

  • individual stocks and shares
  • index-linked funds
  • unit trusts
  • investment trusts
  • corporate/government bonds
  • exchange-traded funds

This definitely adds a different dynamic and introduces a degree of complexity, which means research is crucial. It’s important you know and are comfortable with what you are getting into. The rewards, however, usually make it worth it in the long run.

You can have complete control over what you invest in. But to help make investing accessible and easy to newcomers, many platforms offer assistance. The degree of help can be thought of in three categories:

  • Do it yourself – you are in complete control of what you invest in and are responsible for balancing your portfolio. These platforms are best suited for those who know what they are doing. Examples include Cavendish and iWeb.
  • Do it with me – these platforms offer a bit more help and may guide you towards certain funds. There is usually some information available to help you assess your options. Ultimately, you still get to pick and make the decisions. Check out AJ Bell and Vanguard which are both popular platforms.
  • Do it for me – ideal platforms for beginners. They often ask you a series of questions to qualify factors such as your budget and appetite for risk. Based on your responses, they then recommend particular investment portfolios. Both Nutmeg and Wealthify are seeing an increase in their popularity as they make it so easy.

Stocks and Shares ISA charges

Speaking of charges, this section is really important. Charges can make a huge impact on the value of your investments over the long term, particularly as your funds grow into significant sums.

The more money you have, then the more knowing about (and reducing) the charges become important.

This is an important area to learn more about even if you’re just starting out. It will help make your platform and investment decisions easier.

There are a number of different charging mechanisms that make up the cost of investing:

Platform fees

The platform who you choose to invest through, such as one of the platform providers mentioned above like Nutmeg. It is through this platform that you log in, make changes and buy investments etc. Platform charges vary from a fixed fee to a percentage of the value of your funds.

Fund Manager fees

Once you’ve selected your platform, it’s time to choose which funds to invest in. Those funds are run by ‘fund managers’ which levy a fee for their service, ranging anywhere from 0.1% to 1%+.

Selling/buying fees

There is usually a charge ranging between £0 and £25 every time you buy or sell a fund. If you plan on buying/selling regularly, these can soon add up, so look for a low or fixed rate fee.

Transfer out fee

You can and possibly should move your ISA between platforms, to take advantage of lower fees for example. Just be aware, however, that doing so can carry a fee that should be calculated for. Some platforms don’t charge anything. Others charge based on the number of funds you are invested in, which could add up.

It’s important to know the charges for all of these aspects when comparing or opening new Stocks and Shares ISA. The ‘art’ comes in knowing that while some platform fees may be more expensive, the fund fees or other charges within them are significantly less, making them cheaper overall.

At ESM, we’ve set up a spreadsheet which is stored in our Investments folder in Google Drive. There is then a column for each charge type so we can make accurate comparisons.

What is the benefit of a Stocks and Shares ISA?

You can invest outside of an ISA, of course, and you will be taxed on the earnings that you make. How much you invest is limitless, however.

The benefit of investing within a Stocks and Shares ISA is that you don’t pay tax on the earnings.

That means more money in your back pocket. Furthermore, it makes things simple by not having to declare anything to Mr Tax Man.

The catch is that you can only invest up to £20,000 per tax year, which to be fair is sufficient for the majority of people.

Do I pay tax on a Stocks and Shares ISA?

By investing through a Stocks and Shares ISA, you are now exempt from having to pay the normal taxes that would apply:

  • Capital Gains Tax (CGT) – you do not need to pay tax on any profit you make from selling any investments. This is particularly useful if you already exceed your £12,000 annual CGT allowance. It works both ways though; neither can you use losses to offset against any CGT you incur from other investments.
  • Dividends – any dividends you earn from your investments are tax-free and do not affect your personal £2,000 tax-free Dividend Allowance.
  • Corporate Bonds – are also tax-free when inside a Stocks and Shares ISA.
  • Property Rental – you may have invested in property funds as part of your portfolio diversification. Any rental collected is tax-free when your investment is inside a Stocks and Shares ISA.

So for most people, a Stocks and Shares ISA is not only highly tax efficient, but also makes it hassle-free. This is particularly useful if you have to submit an annual tax return.

Best performing Stocks and Shares ISA

We get this question a lot. It usually comes from the person asking not really understanding what a Stocks and Shares ISAs actually is. In fact, it’s one of the reasons that inspired us to write this guide.

As we’ve now discovered, a Stocks and Shares ISA is just a tax-free wrapper with a £20,000 annual limit. What you invest in within that ISA could be anything from high-risk volatile or emerging markets, to safer yet lower-yield Government bonds.

The point is that it’s highly personal. As a result, the performance will depend on those choices you make and will vary hugely from person to person.

Is a Stocks and Shares ISA better than a Cash ISA?

It’s important to understand that a Stocks and Shares ISA is vastly different from a Cash ISA.

A Cash ISA is really just a savings account and the amount of interest you make is tax-free. They are generally considered low risk and low return. This means your money is fairly safe, but you’re not going to make a whole lot back.

On the other hand, within a Stocks and Shares ISA, you make investments. And like any investments, they go up as well as down, In fact, you could lose your entire capital (the money you put in originally).

They are generally considered higher risk than a Cash ISA, depending on what you invest in. However, over the long term, you should see greater returns. So if you don’t like risk, stick to a Cash ISA.

A technique used by many is to grow their Stocks and Shares ISA investments over 5, 10 or 20 plus years. Then as they approach retirement, they transfer their funds to a Cash ISA in order to de-risk.

Are Stocks and Shares ISAs safe?

The good news is that Stocks and Shares ISAs (unlike Innovative Finance ISAs) are protected by the FSCS (Financial Services Compensation Scheme).

The not-so-good news is that because they are seen as investments, you are only protected up to £50,000. At least with a Cash ISA, they will protect you to £85,000.

Remember, FSCS protection is per individual per financial institution. So if you have over the limit with one provider even across multiple products, then you are at risk.

Crucially, this ‘protection’ is against if the financial institute you invest through goes bust. It does not protect you against losses your investments make. That’s all part of the risk, or ‘fun’ of investing.

To find out which ISAs are covered by the FSCS, check out the ‘ISAs at a Glance’ table in our Complete ISA Guide.

Can I have a Cash ISA and Stocks and Shares ISA in the same year?

Yes, you can have different ISA types open at the same time and pay into them all during a single tax year.

Remember that your annual £20,000 allowance applies to all of your ISAs. So if you have paid in £10,000 to your Cash ISA this year, you only have a maximum of £10,000 left for your Stocks and Shares (or other types of) ISA this tax year.

Can I invest in two Stocks and Shares ISAs?

No, not in the same tax year.

You can have more than one Stocks and Shares ISA open, but you may only pay into one of those each tax year.

Stocks and Shares are for investing and should only be used by those comfortable with the associated risks. For those that are, then the returns can be higher than a standard Cash ISA. Furthermore, compared to investing outside of Stocks and Shares ISA, they have powerful tax-free benefits which are good for your back pocket and remove the need to become a tax expert.

EatSleepMoney.co.uk does not offer financial advice and is intended for reference/information only. Remember, you should always carry out your own research and/or take specific professional advice before choosing any financial products or services or undertaking any business or financial venture. Investments may go up as well as down and you may get back less than you put in.

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Stocks & Shares ISA – simple, tax-free investing
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