What’s a Stocks & Shares ISA and how does it work?

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CMC Invest

29 November 2022

Key points

  • Stocks & Shares ISAs allow you to invest a certain amount each year while avoiding charges like capital gains tax.
  • There are a few iterations of these accounts, with the main differences concerning who can invest in them and when money can be withdrawn.
  • Providers of Stocks & Shares ISAs will often charge a fee for access to them and may also charge if you wish to transfer to another provider.
  • It’s a common misconception that money is “locked” in an ISA, but this isn’t the case for all accounts. Many allow withdrawals. Some providers also offer flexible ISAs, which allow for money to be withdrawn without depleting your annual ISA allowance.

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Important: This information is for guidance purposes and may become out of date at any given time. It is not investment advice. Investments can rise and fall in value. We won’t make any assessment of whether the investments you choose are appropriate or suitable for you. If you are unsure of the suitability of any investment, investment service or strategy, you should seek independent financial advice. Past performance is not a reliable indicator of future results. Capital is at risk. Tax treatment will depend on your individual circumstances and could potentially change in the future.

It’s not always easy to think about investing for long-term financial goals. For sure, there are things you can buy today that can provide instant gratification. The joy that comes from buying a new TV or taking a quick holiday potentially trumps a purchase you won’t make for at least another five years.

Investors, however, can be incentivised to think for the long term. One way of doing this is offering tax benefits when putting money to work in Individual Savings Accounts – or ISAs.

In this guide, we cover the key points you need to know about Stocks & Shares ISAs, including the various iterations that are available, how to open one of these accounts, and what you can invest in. Please note that tax treatment will depend on your individual circumstances and could potentially change in the future.

Stocks & Shares ISAs: the basics

A Stocks & Shares ISA is a tax wrapper that protects an investor’s account from certain charges:

Stocks and shares ISA benefits

As the name suggests, you can hold equity investments within a Stocks & Shares ISA. This differs to cash ISAs, which are more like savings accounts in that they pay an interest rate on cash holdings.

An investor needs to be at least 18-years-old to open a Stocks & Shares ISA. Some providers offer junior ISAs for those under 18 that must be opened by a parent or legal guardian.

“The annual ISA saving and investing allowance for the 2023/24 tax year is £20,000.”

Is there a limit to how much you can pay into a Stocks & Shares ISA?

Yes, there is. The annual ISA saving and investing allowance for the 2023/24 tax year is £20,000.

The allowance can be spread across multiple ISAs. If you also have a cash ISA and/or an innovation finance ISA – in addition to a Stocks & Shares ISA – you can also contribute some of this sum to these accounts.

At the moment, you can only pay into one of each type of ISA in a single tax year. If you had two Stocks & Shares ISAs, for example, you can't contribute to both during the same tax year. This rule is changing in the 2024/25 tax year, however, allowing you to pay money into two ISAs of the same type in the same tax year.

How do Stocks & Shares ISAs work?

Investing using a Stocks & Shares ISA account similar to using a general investment account. You can buy into individual companies as well as a range of exchanged-traded funds​ (ETFs) and investment trusts. A big difference is you won’t have to pay capital gains tax or declare any income or interest on a tax return.

What is a Flexible Stocks & Shares ISA?

"A Flexible Stocks & Shares ISA is one that allows you to withdraw money and later reinvest into the same ISA in the same tax year without affecting your annual allowance."

A Flexible Stocks & Shares ISA is one that allows you to withdraw money and later reinvest into the same ISA in the same tax year without affecting your annual allowance. Not all platforms/providers offer these products, so do your research to find out if you're able to access flexible accounts.

For example, let’s say you deposit £12,500 but later withdraw £2,500. In a standard Stocks & Shares ISA, you’d only have £7,500 left to invest during the year before reaching the maximum £20,000 contribution. With a flexible ISA account, however, you’d still be able to invest £10,000 because of the withdrawal you’d made.

Stocks & Shares ISAs vs. General Investment Account

Some investors may prefer a Stocks & Shares ISA over a general investment account as you can buy and sell assets without having to worry about whether you’re going to exceed the government’s capital disposals limit.

The capital gains allowance for the tax year 2023/2024 is £6,000 outside tax-wrappers like a Stocks & Shares ISA. This means that if you utilised a general investment account, exceeding the allowance by just £1 would mean needing to declare the profit to HMRC. There’s also a lesser-known rule that you need to report capital gains if the total amount you disposed of from sales in a tax year is four times the limit or more – i.e., £24,000. This is the case, even if you’ve made a loss.

How can I open a Stock & Shares ISA?

Just like any investment account, the provider will need your address, date of birth, phone number and national insurance number. You need to be a UK resident to open any type of ISA account.

Some providers will use a credit reference agency to automatically verify your identity. Others may request a copy of an identification document along with proof of address.

What can you invest in?

Typically, you can choose from hundreds of UK-listed and US-listed stocks to invest in. Some providers will offer European-listed and Asian equities​ as well. It’s likely investors will also be able to invest in ETFs listed on the London Stock Exchange.

How to invest in a Stocks & Shares ISA

As with any investment, it’s important to do your research first. Our Learn hub offers guidance on how to start thinking about developing an investing plan.

What are the fees and costs associated?

Providers can often charge either:

  • A fixed monthly fee.

  • An annual percentage based on the amount of money in your account.

  • A one-time account set-up cost and increased charges for individual trades.

Other fees to be mindful of are:

  • Stamp duty paid on UK-listed stocks, which is 0.5% of your purchase cost.

  • Foreign-exchange charges when investing in stocks priced in foreign currencies.

The above can easily add up if you decide to make multiple trades a day or week.

How do returns on a Stocks & Shares ISA compare to a cash ISA?

Typically, Stocks & Shares ISAs will provide higher returns than if you put your money in a cash ISA or savings account.

Over the last 30 years, the FTSE 100 and S&P 500 – the indexes comprised of the UK’s and US’s largest companies – have returned, on average, between 7-10% per year. That’s higher than the interest you can expect to earn on cash holdings.

However, remember that past performance is not a reliable indicator of future results and that these are average figures. There have been years when both indexes have seen negative returns.

How risky are Stocks & Shares ISAs?

As with any investment, your money place into a Stocks & Shares ISA isn’t protected if a company’s share price drops in value and fails to recover.

Given the risk, Stocks & Shares ISAs may be well suited to those saving for the long term and those who don’t need access to their money in the near future.

It’s important to note, though, that savings up to £85,000 are covered by the Financial Services Compensation Scheme (FSCS) in the unlikely event that your provider becomes insolvent. You should contact your provider for more information on this.

How many accounts can I have?

You can open as many Stocks & Shares ISA accounts that you like over the course of your lifetime. From 6 April 2024, you'll also be able to contribute to as many Stocks & Shares ISAs in the same tax year as you like, providing you stay within your £20,000 annual limit across all accounts.

"A common misconception is that your money is locked into an ISA account once deposited, but this isn’t true for all."

What do I need to know about withdrawing money?

A common misconception is that your money is locked into an ISA account once deposited, but this isn’t true for all. You can either make withdrawals, leave it as cash in your account or reinvest at a later date as long you don’t go over your annual allowance. As mentioned earlier, if you have a Flexible Stocks & Shares ISA, these withdrawals won’t count towards your annual allowance.

Can I change providers for my Stocks & Shares ISA?

You can transfer Stocks & Shares ISAs to other providers. Some may charge a transfer fee, however.

If you’re transferring a Stocks & Shares ISA, it’s best to check that the provider you want to move to allows you to trade the stocks, ETFs and investment trusts that you already own.